UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended ~~June~~September 30, 2009


o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


		For the Transition Period from to

Commission File Number 000-51446

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.

(Exact name of registrant as specified in its charter)



Delaware		02-0636095
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

121 South 17^thStreet

Mattoon, Illinois 61938-3987
(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (217) 235-3311

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filero	Accelerated filerþ	Non-accelerated filero	~~Smaller reporting company~~o
		(Do not check if a smaller reporting company)	Smaller reporting companyo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

The number of shares of the registrant’s common stock, $.01 par value, outstanding as of ~~August~~November 3, 2009 was ~~29,645,467.~~29,642,228.

PART I. FINANCIAL INFORMATION


Item 1.		Financial Statements

Consolidated Communications Holdings, Inc.

Condensed Consolidated Statements of Income
(Amounts in thousands, except per share amounts)
(Unaudited)


	Three Months Ended						Six Months Ended						Three Months Ended						Nine Months Ended
	June 30,						June 30,						September 30,						September 30,
	2009			2008			2009			2008			2009			2008			2009			2008
Revenues	$	102,042		$	106,444		$	203,752		$	211,858		$	101,590		$	103,824		$	305,342		$	315,682
Operating expenses:
Cost of services and products (exclusive of depreciation and amorization shown separately below)		36,344			36,108			72,444			69,971
Cost of services and products (exclusive of depreciation and amortization shown separately below)														36,151			37,778			108,595			107,749
Selling, general and administrative expenses		25,850			26,911			53,727			55,055			25,600			26,162			79,327			81,217
Depreciation and amortization		20,981			22,350			42,658			45,221			21,341			22,841			63,999			68,062

Income from operations		18,867			21,075			34,923			41,611			18,498			17,043			53,421			58,654
Other income (expense):
Interest income		15			64			37			288			10			41			47			329
Interest expense		(14,564	)		(16,048	)		(29,056	)		(34,326	)		(14,785	)		(13,637	)		(43,841	)		(47,963	)
Investment income		6,761			4,845			11,809			9,207			6,237			5,918			18,046			15,125
Loss on extinguishment of debt		—			(9,224	)		—			(9,224	)		—			—			—			(9,224	)
Other, net		1,766			(129	)		1,215			(114	)		(183	)		13			1,032			(101	)

Income before income taxes		12,845			583			18,928			7,442			9,777			9,378			28,705			16,820
Income tax expense		5,186			270			7,572			3,148			2,494			4,262			10,066			7,410


Net income		7,659			313			11,356			4,294			7,283			5,116			18,639			9,410
Less: Net income attributable to noncontrolling interest		136			133			543			405			226			145			769			550

Net income attributable to Consolidated
Communications Holdings, Inc.	$	7,523		$	180		$	10,813		$	3,889
Net income attributable to Consolidated Communications Holdings, Inc.													$	7,057		$	4,971		$	17,870		$	8,860

Net income per share attributable to Consolidated
Communications Holdings, Inc. common stockholders —
Net income per share attributable to Consolidated Communications Holdings, Inc. common stockholders’ -
Basic	$	0.26		$	0.01		$	0.37		$	0.13		$	0.24		$	0.17		$	0.60		$	0.30

Diluted	$	0.25		$	0.01		$	0.37		$	0.13		$	0.24		$	0.17		$	0.60		$	0.30


Cash dividends declared per common share	$	0.38		$	0.38		$	0.77		$	0.77		$	0.39		$	0.39		$	1.16		$	1.16

Consolidated Communications Holdings, Inc.

Condensed Consolidated Balance Sheets
(Amounts in thousands, except share and per share amounts)


	June 30,			December 31,			September 30,			December 31,
	2009			2008			2009			2008
	(unaudited)						(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	20,025		$	15,471		$	31,883		$	15,471
Accounts receivable, net of allowance of $1,478 and $1,908 respectively		46,229			45,092
Accounts receivable, net of allowance of $1,892 and $1,908, respectively								44,990			45,092
Inventories		7,068			7,482			7,118			7,482
Deferred income taxes		3,600			3,600			7,093			3,600
Prepaid expenses and other current assets		6,047			6,931			7,348			6,931

Total current assets		82,969			78,576			98,432			78,576

Property, plant and equipment, net		388,058			400,286			382,642			400,286
Intangibles and other assets:
Investments		97,575			95,657			97,809			95,657
Goodwill		520,562			520,562			520,562			520,562
Customer lists, net		113,168			124,249			107,629			124,249
Tradenames		14,291			14,291			14,291			14,291
Deferred financing costs and other assets		7,239			8,005			6,926			8,005

Total assets	$	1,223,862		$	1,241,626		$	1,228,291		$	1,241,626


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of capital lease obligations	$	813		$	922		$	581		$	922
Current portion of pension and post retirement benefit obligations		2,960			2,960			2,960			2,960
Accounts payable		10,790			12,336			11,467			12,336
Advance billings and customer deposits		22,069			19,102			22,162			19,102
Dividends payable		11,394			11,388			11,484			11,388
Accrued expenses		25,576			24,584			22,435			24,584

Total current liabilities		73,602			71,292			71,089			71,292

Capital lease obligations less current portion		—			344			—			344
Long-term debt		880,000			880,000			880,000			880,000
Deferred income taxes		59,526			58,134			70,180			58,134
Pension and postretirement benefit obligations		100,655			107,741			100,577			107,741
Other liabilities		38,224			48,830			38,228			48,830

Total liabilities		1,152,007			1,166,341			1,160,074			1,166,341


Equity:
Consolidated Communications Holdings, Inc. stockholders’ equity:
Common stock, $0.01 par value, 100,000,000 shares, authorized, 29,645,467 and 29,488,408 issued and outstanding, respectively		296			295
Common stock, $0.01 par value, 100,000,000 shares, authorized, 29,642,228 and 29,488,408 issued and outstanding, respectively								296			295
Paid in capital		118,009			129,284			114,029			129,284
Retained earnings		—			—			—			—
Accumulated other comprehensive loss		(52,178	)		(59,479	)		(52,062	)		(59,479	)

Total Consolidated Communications Holdings, Inc. stockholders’ equity		66,127			70,100			62,263			70,100
Noncontrolling interest		5,728			5,185			5,954			5,185

Total equity		71,855			75,285			68,217			75,285

Total liabilities and stockholders’ equity	$	1,223,862		$	1,241,626		$	1,228,291		$	1,241,626

Consolidated Communications Holdings, Inc.

Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)


	Nine Months Ended
	September 30,
	2009			2008
OPERATING ACTIVITIES
Net income	$	18,639		$	9,410
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		63,999			68,062
Loss on extinguishment of debt		—			9,224
Deferred income tax		8,553			(2,961	)
Partnership income		(2,299	)		(1,823	)
Non-cash stock-based compensation		1,434			1,402
Amortization of deferred financing costs		978			1,119
Changes in operating assets and liabilities:
Accounts receivable		102			(2,324	)
Inventories		364			(730	)
Other assets		651			(1,215	)
Accounts payable		(869	)		(6,665	)
Accrued expenses and other liabilities		(9,342	)		(6,853	)

Net cash provided by operating activities		82,210			66,646

INVESTING ACTIVITIES
Proceeds from sale of assets		300			—
Capital expenditures		(30,952	)		(37,131	)

Net cash used in investing activities		(30,652	)		(37,131	)

FINANCING ACTIVITIES
Proceeds from long-term obligations		—			120,000
Payments made on long-term obligations		—			(136,337	)
Payment of deferred financing costs		—			(240	)
Payment of capital lease obligation		(685	)		(750	)
Purchase and retirement of common stock		(9	)		(8	)
Dividends on common stock		(34,452	)		(34,086	)

Net cash used in financing activities		(35,146	)		(51,421	)

Net increase (decrease) in cash and cash equivalents		16,412			(21,906	)
Cash and cash equivalents at beginning of period		15,471			34,341

Cash and cash equivalents at end of period	$	31,883		$	12,435

See accompanying notes

Consolidated Communications Holdings, Inc.
~~Consolidated Statements of Cash Flows~~
~~(Amounts in thousands)~~
~~(Unaudited)~~

Six Months Ended June 30,
2009 2008
OPERATING ACTIVITIES
Net income $ 11,356 $ 4,294
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 42,658 45,221
Loss on extinguishment of debt — 9,224
Deferred income tax 1,392 (3,148 )
Partnership income (1,972 ) (821 )
Non-cash stock compensation 932 860
Amortization of deferred financing costs 655 806
Changes in operating assets and liabilities:
Accounts receivable (1,137 ) (776 )
Inventories 414 (871 )
Other assets 1,678 (3,078 )
Accounts payable (1,546 ) (4,588 )
Accrued expenses and other liabilities (6,432 ) (4,943 )

Net cash provided by operating activities 47,998 42,180

INVESTING ACTIVITIES
Proceeds from sale of assets 300 —
Capital expenditures (20,375 ) (26,286 )

Net cash used in investing activities (20,075 ) (26,286 )

FINANCING ACTIVITIES
Proceeds from long-term obligations — 120,000
Payments made on long-term obligations — (136,337 )
Payment of deferred financing costs — (240 )
Payment of capital lease obligation (453 ) (496 )
Purchase and retirement of common stock (9 ) (8 )
Dividends on participating securities (126 ) —
Dividends on common stock (22,781 ) (22,721 )

Net cash used in financing activities (23,369 ) (39,802 )

Net increase (decrease) in cash and cash equivalents 4,554 (23,908 )
Cash and cash equivalents at beginning of period 15,471 34,341

Cash and cash equivalents at end of period $ 20,025 $ 10,433

~~See accompanying notes~~

~~Consolidated Communications Holdings, Inc.~~
Condensed Consolidated Statement of Changes in Stockholders’ Equity
~~Six~~Nine Months Ended ~~June~~September 30, 2009
(Amounts in thousands, except share amounts)
(Unaudited)


	Consolidated Communications Holdings, Inc. Stockholders’ Equity																			Consolidated Communications Holdings, Inc. Stockholders Equity
												Accumulated																			Accumulated
												Other																			Other
	Common Stock								Retained			Comprehensive			Noncontrolling					Common Stock								Retained			Comprehensive			Noncontrolling
	Shares			Amount		Paid in Capital			Earnings			Loss			Interest		Total			Shares			Amount		Paid in Capital			Earnings			Loss			Interest		Total
Balance, January 1, 2009		29,488,408		$	295	$	129,284		$	—		$	(59,479	)	$	5,185	$	75,285			29,488,408		$	295	$	129,284		$	—		$	(59,479	)	$	5,185	$	75,285

Net income		—			—		—			10,813			—			543		11,356			—			—		—			17,870			—			769		18,639
Dividends on common stock		—			—		(12,100	)		(10,813	)		—			—		(22,913	)		—			—		(16,582	)		(17,870	)		—			—		(34,452	)
Shares issued under employee plan, net of forfeitures		157,991			1		(1	)		—			—			—		—			154,752			1		(1	)		—			—			—		—
Non-cash stock compensation		—			—		932			—			—			—		932			—			—		1,434			—			—			—		1,434
Purchase and retirement of common stock		(932	)		—		(9	)		—			—			—		(9	)		(932	)		—		(9	)		—			—			—		(9	)
Pension tax adjustment		—			—		(97	)		—			97			—		—			—			—		(97	)		—			97			—		—
Change in prior service cost and net loss, net of $319 of tax		—			—		—			—			521			—		521
Change in fair value of cash flow hedges, net of $3,835 of tax		—			—		—			—			6,683			—		6,683
Change in prior service cost and net loss, net of $478 of tax																					—			—		—			—			780			—		780
Change in fair value of cash flow hedges, net of $3,753 of tax																					—			—		—			—			6,540			—		6,540


Balance, June 30, 2009		29,645,467		$	296	$	118,009		$	—		$	(52,178	)	$	5,728	$	71,855
Balance, September 30, 2009																					29,642,228		$	296	$	114,029		$	—		$	(52,062	)	$	5,954	$	68,217

See accompanying notes

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and ~~six~~nine months ended ~~June~~September 30, 2009 and 2008
~~(Dollars in thousands, except share and per share amounts)~~

1.(1.) Description of Business

Consolidated Communications Holdings, Inc. and its wholly owned subsidiaries, ~~(the~~which are collectively referred to as “Consolidated”, the “Company”~~) operate~~, “we”, “our” or “us” unless the context otherwise requires, operates its businesses under the name Consolidated Communications. The Company is an established rural local exchange company (“RLEC”) providing communications services to residential and business customers in Illinois, Texas and Pennsylvania. With ~~approximately 254,593~~250,370 local access lines, ~~72,062~~an estimated 71,723 Competitive Local Exchange Carrier (“CLEC”) access line equivalents, ~~95,656~~97,750 digital subscriber lines (“DSL”) and ~~19,731~~21,518 Internet Protocol digital television (“IPTV”) subscribers at September 30, 2009, the Company offers a wide range of telecommunications services, including local and long distance service, digital telephone service (VOIP), custom calling features, private line services, dial-up and high-speed ~~Internet~~broadband internet access, IPTV, carrier access services, network capacity services over our regional fiber optic network, directory publishing and CLEC calling services. The Company also operates a number of complementary businesses, including telemarketing and order fulfillment; telephone services to county jails and state prisons; equipment sales; and operator services.

2.(2.) Presentation of Interim Financial Statements

These unaudited interim condensed consolidated financial statements include the accounts of Consolidated Communications Holdings, Inc. and its wholly owned subsidiaries and subsidiaries in which it has a controlling financial interest. All ~~material~~significant intercompany balances and transactions have been eliminated in consolidation. ~~These~~

We have prepared the unaudited interim condensed consolidated financial statements ~~have been prepared in accordance with~~included herein pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) ~~guidelines and do not include all of the~~. Certain information and ~~footnotes required by U.S.~~footnote disclosures normally included in statements prepared in accordance with generally accepted accounting principles (“GAAP”) ~~for complete financial statements.~~have been omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to make the information presented not misleading. These interim financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of its financial position and results of operations for the interim periods. All such adjustments are of a normal recurring nature. Interim results are not necessarily indicative of the results that may be expected for the entire year. These interim financial statements should be read in conjunction with the financial statements and ~~related~~ notes thereto included in our Annual Report on Form 10-K for the year ended December 31, ~~2008,~~2008.

The accompanying unaudited interim condensed consolidated financial statements presented herewith reflect all adjustments (consisting of only normal and recurring adjustments unless otherwise disclosed) which, ~~were included~~ in ~~our annual report on Form 10-K previously filed with~~ the ~~SEC.~~opinion of management, are necessary for a fair presentation of the results of operations for the three and nine month periods ended September 30, 2009 and 2008. The results of operations for interim periods are not necessarily indicative of results to be expected for an entire year.

Certain prior year amounts have been reclassified to conform to the current year’s presentation. These reclassifications had no effect on total assets, total stockholders’ equity, total revenue, income from operations or net income.

3.(3.) Recent Accounting Pronouncements

In June ~~2008,~~2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2009-01,Generally Accepted Accounting Principles,which establishes the FASB ~~Staff Position (“FSP”~~Accounting Standards Codification (the “Codification”) ~~No. EITF 03-6-1 “Determining Whether Instruments Granted in Share-Based Payment Transactions~~as the official single source of authoritative U.S. GAAP. All existing accounting standards are Participating Securities”. This FSP, which became effective January 1, 2009, provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and should besuperseded. All other accounting guidance not included in the ~~computation of earnings per share pursuant to~~Codification will be considered non-authoritative. The Codification also includes all relevant SEC guidance organized using the two-class method. As the Company’s restricted shares are considered participating securities because they entitle holders to receive nonforfeitable dividends during the vesting term, the Company applied the two-class method of computing basic and diluted earnings per share for all periods presented. The FSP had no effect on its results of operations and financial condition, or on basic or diluted earnings per share.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161 (“SFAS No. 161”), “Disclosure about Derivative Instruments and Hedging Activities—an Amendment of FASB Statement No. 133”. SFAS No. 161 requires entities that utilize derivative instruments to provide qualitative disclosures about their objectives and strategies for using such instruments, as well as any details of credit-risk-related contingent features contained within derivatives. SFAS No. 161 also requires reporting entities to disclose additional information about the amounts and location of derivativessame topical structure in separate sections within the financial statements, how the provisions of Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (“SFAS No. 133) have been applied, and the impact that hedges have on the entity’s financial position, financial performance, and cash flows. The Company has adopted SFAS No. 161 effective January 1, 2009. Please refer to Note 7 for disclosures required by SFAS No. 161.Codification.

Following the Codification, the FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (“ASU”) which will serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification.

The Codification is not intended to change GAAP, but it will change the way GAAP is organized and presented. The Codification is effective for our third quarter 2009 financial statements and the principal impact on our financial statements is limited to disclosures, as all future references to authoritative accounting literature will be referenced in accordance with the Codification.

In December 2007, the FASB issued ~~Statement~~authoritative guidance on the presentation of ~~Financial Accounting Standards No. 160 (“SFAS No. 160”), “Noncontrolling Interests~~noncontrolling interests in ~~Consolidated Financial Statements—an Amendment of ARB No. 51”. SFAS No. 160~~consolidated financial statements. This guidance clarifies that a noncontrolling interest in a consolidated subsidiary should be reported as equity in the consolidated financial statements. It also requires consolidated net income to include the amounts attributable to both the parent and the noncontrolling interest. ~~The Company has~~We adopted ~~SFAS No. 160~~this guidance effective January 1, ~~2009.~~2009 on a retrospective basis. As of December 31, 2008, equity increased by ~~$5,185~~approximately $5.2 million for the ~~inclusion~~reclassification of noncontrolling interests.

In December 2007, the FASB ~~issued Statement of Financial Accounting Standards No. 141 (revised 2007) (“SFAS No. 141(R)”) “Business Combinations”. SFAS No. 141(R) retains~~revised the ~~fundamental requirements of the original pronouncement requiring that the purchase method be used~~authoritative guidance for ~~all~~ business combinations. ~~SFAS No. 141(R) defines~~This guidance establishes principles and requirements for how the acquirer ~~as the entity that obtains control of one or more businesses~~ in a business combination ~~establishes~~recognizes and measures in its financial statements the ~~acquisition date as the date the acquirer achieves control, and requires the acquirer to recognize the~~identifiable assets acquired, the liabilities assumed and any non-controlling interest ~~at their fair values as~~in the acquiree. This guidance significantly changes the accounting for business combinations in a number of areas, including the treatment of contingent consideration, preacquisition contingencies, transaction costs and restructuring costs. In addition, under the new guidance, changes in an acquired entity’s deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. This guidance was effective for fiscal years beginning on or after December 15, 2008 and requires the immediate expensing of acquisition ~~date. SFAS No. 141(R) also requires, among other things, that acquisition-related~~related costs ~~be recognized separately from the acquisition. The Company adopted SFAS No. 141(R) effective~~associated with acquisitions completed after December 31, 2008. Adoption of this guidance on January 1, 2009 had no impact on the Company’s results of operations and ~~expects it~~financial position. However, we expect this guidance will affect acquisitions made thereafter, though the impact will depend upon the size and nature of the acquisition.

In March 2008, the FASB issued authoritative guidance on disclosures about derivative instruments and hedging activities. This guidance addresses enhanced disclosures concerning (a) the manner in which an entity uses derivatives (and the reasons it uses them), (b) the manner in which derivatives and related hedged items are accounted for and (c) the effects that derivatives and related hedged items have on an entity’s financial position, financial performance, and cash flows. This guidance was effective for financial statements issued for fiscal years and interim periods beginning on or after November 15, 2008. Adoption of this guidance on January 1, 2009 did not have a material impact on our financial position or results of operations (see Note 7).

In June 2008, the FASB issued authoritative guidance on the treatment of participating securities in the calculation of earnings per share (“EPS”). This guidance addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing EPS under the two-class method. This guidance was effective for fiscal years beginning on or after December 15, 2008. Adoption of this guidance on January 1, 2009 did not have a material impact on our results of operations and financial position, or on basic or diluted earnings per share.

In December 2008, the FASB issued guidance on an employers’ disclosures about postretirement benefit plan assets. This guidance requires additional disclosures about assets held in an employer’s defined benefit pension or other postretirement plan, primarily related to categories and fair value measurements of plan assets. This guidance is effective for us as of December 31, 2009. Because this guidance applies only to financial statement disclosures, the adoption is not expected to have a material effect on our consolidated financial statements.

In April 2009, the FASB issued ~~FSP FAS 107-1 and APB 28-1, “Interim Disclosures~~authoritative guidance on interim disclosures about ~~Fair Value~~fair value of ~~Financial Instruments”.~~financial instruments. This ~~FSP amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments”, to require~~guidance requires disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements for interim financial information. This FSP also amends Accounting Principles Board Opinion No. 28, “Interim Financial Reporting”, to require those disclosures in summarized financial information at interim periods. The FSPreporting periods ending after June 15, 2009. Adoption of this guidance had no effect on ~~its~~our results of operations or financial ~~condition. Please refer to~~condition (see Note 8).

7 ~~for disclosures required by this FSP.~~

In May 2009, the FASB issued ~~Statement~~authoritative guidance on subsequent events. This guidance establishes general standards of ~~Financial Accounting Standards No. 165 (“SFAS No. 165”), “Subsequent Events”. SFAS No 165 incorporates guidance into~~ accounting ~~literature that was previously addressed only in auditing standards. SFAS No. 165 refers to subsequent~~for and disclosure of events that ~~provide additional evidence about conditions that existed at~~occur after the balance sheet date ~~as “recognized subsequent events”. Subsequent events which provide evidence about conditions that arose after the balance sheet~~ but ~~prior to the issuance of the~~before financial statements are referred to as “non-recognized subsequent events”. It also requires companies to disclose the date through which subsequent events have been evaluated and whether this date is the date financial statements were issued or ~~the date the financial statements were~~are available to be issued. ~~Please refer to Note 10 for disclosures required by SFAS No. 165.~~

~~In December 2008, the FASB issued FSP SFAS 132(R)-1 (“SFAS 132(R)-1”),“Employers’ Disclosures about Postretirement Benefit Plan Assets” which provides~~This guidance on an employer’s disclosures about plan assets of a defined benefit pension and other postretirement plan. SFAS 132(R)-1 requires employers to disclose the fair value of each major category of plan assets as of each annual reporting date for which a statement of financial position is presented; the inputs and valuation technique used to develop fair value measurements of plan assets at the annual reporting date, including the level within the fair value hierarchy in which the fair value measurements fall as defined by SFAS No. 157 (“SFAS No. 157”), “Fair Value Measurements;” investment policies and strategies, including target allocation percentages; and significant concentrations of risk in plan assets. SFAS 132(R)-1 is effective for ~~fiscal years~~interim or annual financial periods ending after ~~December~~June 15, ~~2009 and will~~2009. Adoption of this guidance did not have an impact on ~~future~~our consolidated results of operations or financial position (see Note 16).

In August 2009, the FASB updated its authoritative guidance on fair value measurements and disclosures. This update provides amendments to reduce potential ambiguity in financial ~~condition but~~reporting when measuring the fair value of liabilities. Among other provisions, this update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the valuation techniques described in ASC Update 2009-05. ASC Update 2009-05 will become effective for our annual financial statements for the year ended December 31, 2009. We have annot yet determined the impact that this update may have on ~~the Company’s disclosures.~~our financial statements.

In 2007, the Company, through certain of its wholly-owned subsidiaries, entered into a credit agreement with several financial institutions, which provides for borrowings of up to ~~$950,000~~$950 million, consisting of a ~~$760,000~~$760 million term loan facility, a ~~$50,000~~$50 million revolving credit facility (including a $10 million sub-limit for letters of credit), and a ~~$140,000~~$140 million delayed draw term loan facility (“DDTL”). The DDTL’s sole purpose was for the funding of the redemption of ~~the Company’s~~our then outstanding senior notes plus any associated fees or redemption premium. As described more fully below, ~~the Company~~we borrowed ~~$120,000~~$120 million under the DDTL on April 1, 2008, at which time the commitment for the remaining ~~$20,000~~$20 million that was originally available under the DDTL expired. ~~Other~~The other borrowings under the credit facility were used to retire ~~the Company’s previous $464,000~~a previously outstanding $464 million credit facility and to fund ~~the~~our acquisition of North Pittsburgh Systems, Inc. Borrowings under the credit facility are ~~the Company’s senior, secured obligations that are~~ secured by substantially all of the assets of ~~the Company and its subsidiaries~~Consolidated with the exception of Illinois Consolidated Telephone Company. The term loan and DDTL ~~have~~require no ~~interim~~ principal ~~maturities~~reductions prior to maturity and thus mature in full on December 31, 2014. The revolving credit facility matures on December 31, 2013. There were no borrowings outstanding under the revolving credit facility as of ~~June~~September 30, 2009.

At ~~the Company’s~~our election, borrowings under the credit facilities bear interest at a rate equal to an applicable margin plus either a “base rate” or LIBOR. As of ~~June~~September 30, 2009, the applicable margin for interest rates was 2.50% per year for the LIBOR-based term loans and 1.50% for alternative base rate loans. The applicable margin for our ~~$880.0~~$880 million term loan is fixed for the duration of the loan. The applicable margin for borrowings on the revolving credit facility is ~~based on~~determined via a pricing grid. Based on our leverage ratio of ~~4.88:~~4.79:1 ~~as of June~~at September 30, 2009, borrowings under the revolving credit facility will be priced at a margin of 2.75% for LIBOR-based borrowings and 1.75% for alternative base rate ~~borrowings.~~borrowings for the three month period ending December 31, 2009. The applicable borrowing margin for the revolving credit facility is adjusted quarterly to reflect the leverage ratio from the prior quarter-end. ~~At June~~

The weighted average interest rate incurred on our credit facilities during the three month periods ended September 30, 2009 and 2008, ~~the weighted average rate of interest on the Company’s credit facilities,~~ including the effect of interest rate swaps and the applicable margin, was ~~6.27%~~6.26% and ~~6.86%~~6.91% per annum, respectively. ~~Because no active trading exists for the Company’s term loans, the fair value of the debt cannot be determined.~~

The credit agreement contains various provisions and covenants, including, among other items, restrictions on the ability to pay dividends, incur additional indebtedness, issue capital stock, and commit to future capital expenditures. ~~The Company has~~We have agreed to maintain certain financial ratios, including interest coverage, and total net leverage ratios, all as defined in the credit agreement. As of ~~June~~September 30, 2009, ~~the Company was~~we were in compliance with the credit agreement covenants.

On April 1, 2008, ~~the Company~~we redeemed all $130 million of ~~the~~our then outstanding senior notes. The total amount of the redemption was ~~$136,337~~approximately $136.3 million, including a call premium of ~~$6,337.~~$6.3 million. The senior note redemption and payment of accrued interest through the redemption date was funded using ~~$120,000~~$120 million of borrowings on the DDTL together with cash on hand. ~~The Company~~We recognized a loss on extinguishment of debt of ~~$9,224~~approximately $9.2 million related to the redemption premium of $6.3 million and the write-off of unamortized deferred financing ~~costs.~~costs of $2.9 million.

~~7. Financial Instruments and~~(7.) Derivatives

As of June 30, 2009, the Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and long-term obligations. At June 30, 2009 and 2008, the carrying value of these financial instruments approximated fair value.

In order to manage the risk associated with changes in interest rates, ~~the Company maintains~~we maintain interest rate swap agreements that effectively convert a portion of ~~the~~our floating-rate debt to a fixed-rate basis, thereby reducing the impact of interest rate changes on future cash interest payments. ~~At June 30,~~During the third quarter of 2009, the ~~Company has~~amount of our floating-rate term debt that was fixed as a result of the interest rate swap agreements ~~covering $740,000~~totaled $740 million, or 84.1% of our outstanding debt. On September 30, 2009, the notional amount of outstanding floating to fixed interest rate swap ~~agreements. Approximately 84.1% of the floating rate term debt was fixed as of June 30, 2009.~~agreements declined to $680 million. The swaps expire at various times from ~~September 30,~~December 2009 through March ~~13,~~ 2013. The swaps are designated as cash flow hedges of our expected future interest ~~payments in accordance with SFAS No. 133.~~

payments. Under ~~the~~our interest rate swap agreements, ~~prior to September 2008 the Company received~~we receive 3-month LIBOR based interest payments from the swap counterparties and ~~paid~~pay a fixed rate.

In September 2008, due to the larger than normal spread between 1-month LIBOR and 3-month LIBOR, ~~the Company~~we added basis swaps, under which ~~it pays~~we make 3-month LIBOR-based payments less a fixed percentage to the basis swap counterparties, and ~~receives~~receive 1-month LIBOR. At the same time, ~~the Company~~we began utilizing 1-month LIBOR resets on ~~its~~our credit facility. To further reduce potential future income statement impacts from hedge ineffectiveness, we de-designated the ~~Company dedesignated its~~ original interest rate swap contracts and ~~redesignated~~re-designated them, in conjunction with the basis swaps, as of September 4, 2008 as a cash flow hedge designed to mitigate the changes in cash flows on ~~the Company’s~~our credit facility. The effect of the swap portfolio is to fix the cash interest payments on the floating portion of ~~$740,000~~$680 million of debt at a weighted average ~~LIBOR~~LIBO rate of 4.43% exclusive of the applicable borrowing margin on the loans.

In total, ~~the Company has sixteen~~we have nineteen interest rate ~~swaps and six basis~~ swaps. The counterparties to the various swaps are five major U.S. and European banks. None of the swap agreements provide for either ~~the Company~~Consolidated or the counterparties to post collateral nor do the agreements include any covenants related to the financial condition of ~~the Company~~Consolidated or the counterparties. The swaps of any counterparty that is a “Lender” as defined in ~~the Company’s~~our credit facility are secured along with the other creditors under the credit facility. Each of the swap agreements provides that in the event of a bankruptcy filing by either ~~the Company~~Consolidated or the counterparty, any amounts owed between the two parties would be offset in order to determine the net amount due between parties. This provision allows ~~the Company~~us to partially mitigate the risk of non-performance by a counterparty.

8.(8.) Fair Value Measurements

The Company’s derivative instruments related to interest rate swap agreements are required to be measured at fair value on a recurring basis. The fair values of the interest rate swaps are determined using an internal valuation model which relies on the expected LIBOR based yield curve and estimates of counterparty and ~~the Company’s non performance~~Consolidated’s non-performance risk as the most significant inputs. Because each of these inputs are directly observable or can be corroborated by observable market data, ~~the Company has~~we have categorized these interest rate ~~derivatives~~swaps as Level 2.2 within the fair value hierarchy.

Measurements
Using Significant
Unobservable
Inputs (Level 3)
Interest Rate
Derivatives
Balance at December 31, 2008 $ 47,908
Settlements (14,852 )
Total gains or losses (realized/unrealized)
Unrealized gain included in earnings (62 )
Unrealized gain included in other comprehensive income from basis swap (1,361 )
Unrealized loss included in other comprehensive income 5,693
Transfers out of level 3 (37,326 )

Balance at June 30, 2009 $ —

The amount of total gain for the period included in earnings as a component of interest expense $ 62

~~9. Restricted Share Plan~~(9.) Stock-based Compensation

The following table summarizes restricted stock activity during the ~~six~~nine months ended ~~June~~September 30, 2009:


~~Restricted~~Non-vested restricted shares outstanding, December 31, 2008	105,528
Shares granted	157,991
Shares vested	(7,202	)
Shares forfeited or retired	—(3,239	)

Non-vested restricted shares outstanding, September 30, 2009	253,078

~~Restricted shares outstanding, June 30, 2009~~	~~256,317~~

~~The Company~~ We recognized non-cash stock-based compensation expense associated with ~~the~~our restricted ~~shares totaling $499 and $476~~share plan of approximately $0.5 million for each of the three ~~months~~month periods ended ~~June~~September 30, 2009 and 2008, ~~respectively~~ and ~~$932 and $860~~expense of approximately $1.4 million for each of the ~~six months~~nine month periods ended ~~June~~September 30, 2009 and ~~2008, respectively.~~2008. The shares granted during the ~~six~~nine months ended ~~June~~September 30, 2009 includes 96,447 restricted shares granted to certain key employees and directors as well as 61,544 performance based restricted shares. The performance based restricted shares were granted to key employees ~~based~~ upon the Company achieving certain financial and operating targets for 2008 based on a sliding scale. In March 2009, a target of 97,487 performance based restricted shares ~~was~~were approved for issuance in the first quarter of 2010 based upon meeting certain operational and financial goals in 2009. The non-cash stock-based compensation expense is included in “Selling, general and administrative expenses” in the accompanying condensed consolidated statements of income.

~~10. Subsequent Events~~

The Company has evaluated all subsequent events through August 7, 2009, which represents the filing date of this Form 10-Q with the Securities and Exchange Commission, to ensure that this Form 10-Q includes appropriate disclosure of events both recognized in the financial statements as of June 30, 2009, and events which occurred subsequent to June 30, 2009 but were not recognized in the financial statements. The following subsequent event was recognized in the accompanying statement of operations at June 30, 2009, as the complaint was filed before June 30, 2009 and was settled after the balance sheet date but before the financial statements were issued.

~~On October 23, 2006, Verizon Pennsylvania, Inc. and several of its affiliates filed a formal complaint with the Pennsylvania Public Utility Commission (“PAPUC”~~(10.) claiming that the Company’s Pennsylvania CLEC’s intrastate switched access rates violate Pennsylvania law. The provision that Verizon cites in its complaint requires CLEC rates to be no higher than the corresponding incumbent’s rates unless the CLEC can demonstrate that the higher access rates are “cost justified.” Verizon’s original claim requested a refund of $480 from access billings through August 2006. That claim was later revised to include amounts from certain affiliates that had not been included in the original calculation. Verizon’s revised complaint sought $1,346 through December 2006.

The Company contended its CLEC’s switched access rates were permissible and valid under PA PUC rules. In an Initial Decision dated December 5, 2007, the presiding administrative law judge recommended that the PAPUC sustain Verizon’s complaint. As relief, the judge directed the Company’s Pennsylvania CLEC to reduce its access rates down to those of the underlying incumbent exchange carrier and refund to Verizon an amount equal to the access charges collected in excess of the new rate since November 30, 2004. The Company filed exceptions to the full PAPUC, which requested that Verizon and the Company attempt to resolve the issue through mediation.

On July 10, 2009, the Company entered a settlement agreement with Verizon Pennsylvania, Inc. resolving the complaint, recurring access rates and any liability issues. As a result, the Company reduced its previously recorded reserve to the settlement amount and recognized income of $1,779.

~~11.~~ Income Taxes

~~There have been~~ During the nine months ended September 30, 2009, we recorded no ~~changes~~significant change to the balance of unrecognized tax benefits reported at December 31, 2008. ~~As of June~~At both September 30, 2009 and December 31, 2008, ~~the amount of~~we had recorded unrecognized tax benefits ~~was $5,740. The total amount~~totaling $5.7 million. All of ~~unrecognized benefits that, if recognized, would affect the effective tax rate is $5,740. A decrease in~~our unrecognized tax benefits, ~~of $81 and $24 of related accrued interest and penalties is expected~~if recognized in ~~2009 due to the expiration of federal and state statutes of limitations. The~~future periods, would impact our effective tax ~~benefit attributable to $81 of the decrease~~rate. We do not expect any changes in ~~unrecognizable~~our unrecognized tax benefits ~~will result in a reduction~~during the remainder of 2009.

Our practice is to ~~the Company’s effective tax rate.~~

~~The Company is continuing its practice of recognizing~~recognize interest and penalties related to income tax matters in interest expense and general and administrative expense, respectively. Upon adoption of ~~FIN 48~~ the ~~Company~~FASB authoritative guidance on accounting for uncertainty in income taxes, we had no ~~accrual balance~~recorded liability for interest and ~~penalties. At June 30, 2009 the Company~~penalties on unrecognized tax benefits. We had ~~a balance~~$0.9 million of ~~$855 of accrued~~ interest and penalties relating to unrecognized tax benefits recorded as of September 30, 2009, of which ~~$222~~a net $0.3 million was recorded during the ~~six~~nine months ended ~~June~~September 30, 2009 and ~~$272~~$0.2 million was recorded during the ~~six~~nine months ended ~~June~~September 30, 2008. The net increase of $0.3 million for 2009 relates principally to the continued accrual of interest and penalties on our remaining unrecognized tax benefits.

During the first quarter of 2009, ~~the Company~~we settled an IRS exam covering tax years 2005 through 2007 for the Consolidated Communications Holdings, Inc. consolidated filing group. As a result, ~~the Company~~we recorded additional income tax expense of ~~$78. Therefore, the~~$0.1 million. The only federal return periods subject to examination are the ~~2005 through~~2006 and 2007 consolidated returns for the acquired North Pittsburgh Systems, Inc. consolidated filing group, the 2006 through 2009 returns for East Texas Fiber Line, a non-consolidated subsidiary, and the 2008 consolidated return for the Consolidated Communications Holdings, Inc. consolidated filing group. The periods subject to examination for ~~the Company’s~~our state returns are for tax years ~~2004~~2005 through ~~2007. The Company is~~2008. We are currently under examination by state tax authorities. ~~The Company does~~We do not expect any settlement or payment that may result from the audits ~~will~~to have a material effect on ~~the Company’s~~our results of operations or cash flows. ~~The Company does not anticipate that the total~~A decrease in unrecognized tax benefits ~~will significantly change~~of $5.4 million and $0.9 million of related accrued interest and penalties is expected in the next 12 months due to the settlement of audits and the expiration of ~~statute~~federal and state statutes of ~~limitations in the next twelve months.~~limitations. There were no material changes to any of these amounts during the ~~second~~third quarter of 2009.

~~The Company’s~~

Our effective tax rate was ~~40.0%~~35.1% and ~~42.3%~~44.1%, for the ~~six~~nine months ended ~~June~~September 30, 2009 and 2008, and ~~40.4%~~25.5% and ~~46.3%~~45.4% for the three months ended ~~June~~September 30, 2009 and 2008, respectively. The effective rates in 2009 are lower than 2008 due to state tax planning and completion of an internal restructuring as of December 31, 2008. The effective tax rate differs from the federal and state statutory rates primarily due to non-deductible expenses.

We filed 2008 tax returns for the Consolidated Communications Holdings, Inc. consolidated filing group and East Texas Fiber Line during the third quarter of 2009. We filed 2007 tax returns for the Consolidated Communications Holding, Inc. consolidated filing group, East Texas Fiber Line and the North Pittsburgh Systems, Inc. consolidated filing group during the third quarter of 2008. We recognized approximately $0.9 million of tax benefit in the third quarter of 2009 to adjust our 2008 provision to match our 2008 returns, and $0.2 million of tax benefit in the third quarter of 2008 to adjust our 2007 provision to match our 2007 returns.

(11.) Net Income per Common Share

As discussed in Note 3, we adopted the FASB’s authoritative guidance on the treatment of participating securities in the calculation of earnings per share on January 1, 2009 and began using the two-class method to compute basic and diluted earnings per share for all periods presented. The following illustrates the earnings allocation method utilized in the calculation of basic and diluted earnings per share.

~~12. Net Income per Common Share~~


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In thousands, expect per share amounts)	2009		2008		2009		2008
Basic Earnings Per Share Using Two-class Method:
Net income	$	7,283	$	5,116	$	18,639	$	9,410
Less: Net income attributable to noncontrolling interest		226		145		769		550

Net income attributable to common stockholders before allocation of earnings to participating securities		7,057		4,971		17,870		8,860
Less: Earnings allocated to participating securities		90		—		271		—

Net income attributable to common stockholders		6,967		4,971		17,599		8,860
Weighted average number of common shares outstanding		29,389		29,315		29,388		29,315

Net income per common share attributable to common stockholders — basic	$	0.24	$	0.17		0.60	$	0.30


Diluted Earnings Per Share Using Two-class Method:
Net income attributable to common stockholders before allocation of earnings to participating securities	$	7,057	$	4,971	$	17,870	$	8,860
Less: Earnings allocated to participating securities		90		—		271		—

Net income attributable to common stockholders before the reallocation of earnings to participating securities		6,967		4,971		17,599		8,860
Reallocation of earnings of participating securities		—		—		—		—

Net income attributable to common stockholders		6,967		4,971		17,599		8,860
Weighted average number of common shares outstanding — basic		29,389		29,315		29,388		29,315
Dilutive impact of share-based compensation		—		—		—		—

Weighted average number of common shares outstanding — diluted		29,389		29,315		29,388		29,315

Net income per common share attributable to common stockholders — diluted	$	0.24	$	0.17	$	0.60	$	0.30

~~The following table sets forth the computation~~ We had 0.3 million and 0.2 million potentially dilutive securities outstanding representing unvested shares of ~~net income per common share:~~

Three Months Ended Six Months Ended
June 30, June 30,
2009 2008 2009 2008
Basic:

Net income attributable to Consolidated Communications Holdings, Inc. $ 7,523 $ 180 $ 10,813 $ 3,889
Weighted average number of common shares outstanding 29,389,150 29,315,250 29,387,776 29,314,881

Net income per common share $ 0.26 $ 0.01 $ 0.37 $ 0.13

Diluted:

Net income attributable to Consolidated Communications Holdings, Inc. $ 7,523 $ 180 $ 10,813 $ 3,889
Weighted average number of common shares outstanding 29,674,395 29,529,290 29,620,154 29,514,570

Net income per common share $ 0.25 $ 0.01 $ 0.37 $ 0.13

~~Non-vested shares issued pursuant to the Restricted Share Plan (see Note 9)~~restricted stock at September 30, 2009 and 2008, respectively, that were ~~considered~~not included in the computation of ~~net income~~potentially dilutive securities because they were anti-dilutive, and were therefore excluded from the calculation of diluted earnings per share ~~as the recipients are entitled to non-forfeitable dividends and voting rights.~~

Inin accordance with ~~SFAS No. 128, “Earnings~~the FASB’s guidance on earnings per ~~Share,” 29,249 contingent performance based shares were included in the weighted average diluted shares based on the Company’s results through the six months ended June 30, 2009.~~share.

Historically, ~~the Company’s~~our Illinois and Texas ILEC operations followed the ~~accounting~~FASB’s authoritative guidance for regulated enterprises ~~prescribed by Statement of Financial Accounting Standards No. 71 “Accounting~~in accounting for the ~~Effects~~effects of ~~Certain Types~~certain types of ~~Regulation” (“SFAS No. 71”).~~regulation. This ~~accounting recognizes~~authoritative guidance required the recognition of the economic effects of rate regulation by recording costs and a return on investment as such amounts are recovered through rates authorized by regulatory authorities. ~~Recent changes~~Changes to ~~the Company’s operations,~~our business, however, have impacted the dynamics of ~~the Company’s business environment and caused an evaluation of the applicability of SFAS No. 71.~~our operating environment. In the last half of 2008, ~~the Company~~we experienced a significant increase in competition in ~~the~~our Illinois and Texas markets primarily asdue to traditional cable competitors ~~started~~ offering voice services. Also, effective July 1, 2008, ~~the Company~~we made an election to transition from rate of return to price cap regulation at the interstate level for ~~its~~our regulated Illinois and Texas operations. The conversion to price caps provides for greater pricing flexibility, especially in the increasingly competitive special access segment and in launching new products. Additionally, in response to customer demand, ~~the Company~~we launched ~~its~~our own digital telephone service product offering as an alternative to ~~its~~our traditional wireline services. While there have been no material changes in ~~the Company’s~~our bundling strategy or in ~~the Company’s~~our end-user pricing, the pricing structure is transitioning from being based on the recovery of costs to a pricing structure based on market conditions.

Based on ~~the~~these and other factors impacting ~~the Company’s operations, it~~our business, we determined in ~~the fourth quarter of~~late 2008 that the applicability of the authoritative guidance for regulated enterprises was no longer appropriate in the reporting of our financial results. As a result, we began to apply the authoritative guidance required for the discontinuance of application of SFAS No. 71 for reporting our financial results is no longer appropriate. SFAS No. 101, “Regulated Enterprises — Accounting for the Discontinuance of Application of FASB Statement No. 71,” specifies the accounting required when an enterprise ceases to meet the criteria for application of SFAS No. 71. SFAS No. 101regulatory accounting. This authoritative guidance requires the elimination of the effects of any actions of regulators that ~~have~~had been previously been recognized ~~as assets and liabilities~~ in accordance with ~~SFAS No. 71~~the authoritative guidance for regulated enterprises, but that would not have been recognized ~~as assets and liabilities~~ by nonregulated enterprises. Depreciation rates of certain assets established by regulatory authorities for ~~the Company’s~~our telephone operations subject to ~~SFAS No. 71~~the authoritative guidance for regulated enterprises have historically included a systematic charge for removal costs in excess of the related estimated salvage value on those assets, resulting in a net ~~over depreciation~~over-depreciation of those assets over their useful lives. Costs of removal were then appropriately applied against this reserve. Upon discontinuance of ~~SFAS No. 71,~~ the ~~Company~~authoritative guidance for regulated enterprises, we reversed the impact of recognizing removal costs in excess of the related estimated salvage value, which resulted in recording a non-cash extraordinary gain of ~~$7,240,~~approximately $7.2 million, net of taxes of ~~$4,154~~approximately $4.2 million in the three months ended December 31, 2008. Our Pennsylvania ILEC previously discontinued the application of the authoritative guidance for regulated enterprises prior to our acquisition of North Pittsburgh, and, as a result, was not affected by the change in 2008.

custom calling features, private line services, dial-up and high speed ~~Internet~~broadband internet access, IPTV, carrier access services, network capacity services over a regional fiber optic network, and directory publishing. ~~The Company~~We also ~~operates~~operate a number of complementary businesses that comprise “Other Operations,” including telemarketing and order fulfillment, telephone services to county jails and state prisons, equipment sales, and operator services. Management evaluates the performance of these business segments based upon revenue, gross margins, and net operating income.


	Three Months Ended						Six Months Ended						Three Months Ended						Nine Months Ended
	June 30,						June 30,						September 30,						September 30,
	2009			2008			2009			2008

(In thousands)													2009			2008			2009			2008
Operating revenues
Telephone Operations	$	91,143		$	95,637		$	182,838		$	190,611		$	91,279		$	94,323		$	274,117		$	284,934
Other Operations		10,899			10,807			20,914			21,247			10,311			9,501			31,225			30,748

Total	$	102,042		$	106,444		$	203,752		$	211,858		$	101,590		$	103,824		$	305,342		$	315,682


Operating income
Telephone Operations	$	18,372		$	20,746		$	34,400		$	41,600		$	18,108		$	17,204		$	52,508		$	58,804
Other Operations		495			329			523			11			390			(161	)		913			(150	)

Total		18,867			21,075			34,923			41,611			18,498			17,043			53,421			58,654

Interest income		15			64			37			288			10			41			47			329
Interest expense		(14,564	)		(16,048	)		(29,056	)		(34,326	)		(14,785	)		(13,637	)		(43,841	)		(47,963	)
Investment income		6,761			4,845			11,809			9,207			6,237			5,918			18,046			15,125
Loss on extinguishment of debt		—			(9,224	)		—			(9,224	)		—			—			—			(9,224	)
Other, net		1,766			(129	)		1,215			(114	)		(183	)		13			1,032			(101	)


Income before income taxes	$	12,845		$	583		$	18,928		$	7,442		$	9,777		$	9,378		$	28,705		$	16,820

seeks compensatory and punitive damages as the result of alleged lost projected profits, damage to its business reputation, and other costs. It claims to have sustained losses of approximately $125 million, but does not request a specific dollar amount in damages. We believe that these claims are without merit and, regardless of the merit of the claims, the damages are completely unfounded. We intend to defend against these claims vigorously. In the third quarter of 2008, we filed preliminary objections and responses to Salsgiver’s complaint; however, the court ruled against our preliminary objections. On November 3, 2008, we responded to Salsgiver’s amended complaint and filed a counter claim for trespass due to attaching to our poles without an authorized agreement and in an unsafe manner. We do not believe that these claims will have a material adverse impact on our financial results.

We are from time to time involved in various legal proceedings and regulatory actions arising out of our operations. We are not involved in any legal or regulatory proceedings, individually or in the aggregate (other than those described herein), that we believe would have a material adverse effect upon our business, operating results or financial condition.

(16.) Subsequent Events

We have evaluated all subsequent events through November 6, 2009, which represents the filing date of this Form 10-Q with the SEC, to ensure that this Form 10-Q includes appropriate disclosure of events both recognized in the financial statements as of September 30, 2009, and events which occurred subsequent to September 30, 2009 but were not recognized in the financial statements. As of November 6, 2009, there were no subsequent events which required recognition or disclosure.


Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

We present below Management’s Discussion and Analysis of Financial Condition and Results of Operations of Consolidated Communications Holdings, Inc. and its subsidiaries on a consolidated basis. The following discussion should be read in conjunction with our historical financial statements and related notes contained elsewhere in this Report.

“Consolidated Communications” or the “Company” refers to Consolidated Communications Holdings, Inc. alone or with its wholly owned subsidiaries, as the context requires. When this report uses the words “we,” “our,” or “us,” they refer to the Company and its subsidiaries.

Forward-Looking Statements

Any statements contained in this Report that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements and should be evaluated as such. The words “anticipates”, “believes”, “expects”, “intends”, “plans”, “estimates”, “targets”, “projects”, “should”, “may”, “will” and similar words and expressions are intended to identify forward-looking statements. These forward-looking statements are contained throughout this Report, including, but not limited to, statements found in this Part I — Item 2 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, Part I — Item 3 — “Quantitative and Qualitative Disclosures about Market Risk” and Part II — Item 1 — “Legal Proceedings”. Such forward-looking statements reflect, among other things, our current expectations, plans, strategies, and anticipated financial results and involve a number of known and unknown risks, uncertainties, and factors that may cause our actual results to differ materially from those expressed or implied by these forward-looking statements, including but not limited to:

	•		~~various risks to stockholders of not receiving dividends and risks to our ability to pursue growth opportunities if we continue to pay dividends according to our current dividend policy;~~

	•		~~the current volatility in economic conditions and the financial markets;~~

	•		~~adverse changes in the value of assets or obligations associated with our employee benefit plans;~~

	•		~~various risks to the price and volatility of our common stock;~~

	•		~~our substantial amount of debt and our ability to incur additional debt in the future;~~

	•		~~our need for a significant amount of cash to service and repay our debt and to pay dividends on our common stock;~~

	•		~~restrictions contained in our debt agreements that limit the discretion of our management in operating our business;~~

	•		~~the ability to refinance our existing debt as necessary;~~

	•		~~rapid development and introduction of new technologies and intense competition in the telecommunications industry;~~

	•		~~risks associated with our possible pursuit of future acquisitions;~~

	•		~~the length and severity of weakened economic conditions in our service areas in Illinois, Texas and Pennsylvania;~~

	•		~~system failures;~~

	•		~~loss of large customers or government contracts;~~

	•		~~risks associated with the rights-of-way for our network;~~

	•		~~disruptions in our relationship with third party vendors;~~

	•		~~loss of key management personnel and the inability to attract and retain highly qualified management and personnel in the future;~~

various risks to stockholders of not receiving dividends and risks to our ability to pursue growth opportunities if we continue to pay dividends according to our current dividend policy;

the current volatility in economic conditions and the financial markets;

adverse changes in the value of assets or obligations associated with our employee benefit plans;

various risks to the price and volatility of our common stock;

our substantial amount of debt and our ability to incur additional debt in the future;

our need for a significant amount of cash to service and repay our debt and to pay dividends on our common stock;

restrictions contained in our debt agreements that limit the discretion of our management in operating our business;

the ability to refinance our existing debt as necessary;

rapid development and introduction of new technologies and intense competition in the telecommunications industry;

risks associated with our possible pursuit of future acquisitions;

the length and severity of weakened economic conditions in our service areas in Illinois, Texas and Pennsylvania;

system failures;

loss of large customers or government contracts;

risks associated with the rights-of-way for our network;

disruptions in our relationship with third party vendors;

loss of key management personnel and the inability to attract and retain highly qualified management and personnel in the future;

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	•		changes in the extensive governmental legislation and regulations governing telecommunications providers, the provision of telecommunications services and access charges and subsidies, which are a material part of our revenues;

	•		~~telecommunications carriers disputing and/or avoiding their obligations to pay network access charges for use of our network;~~

	•		~~high costs of regulatory compliance;~~

	•		~~the competitive impact of legislation and regulatory changes in the telecommunications industry;~~

	•		~~liability and compliance costs regarding environmental regulations; and~~

	•		the additional risk factors outlined in Part I — Item 1A — “Risk Factors” incorporated by reference from our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, and the other documents that we file with the SEC from time to time that could cause our actual results to differ from our current expectations and from the forward-looking statements discussed in this Report.

changes in the extensive governmental legislation and regulations governing telecommunications providers, the provision of telecommunications services and access charges and subsidies, which are a material part of our revenues;

telecommunications carriers disputing and/or avoiding their obligations to pay network access charges for use of our network;

high costs of regulatory compliance;

the competitive impact of legislation and regulatory changes in the telecommunications industry;

liability and compliance costs regarding environmental regulations; and

the additional risk factors outlined in Part I — Item 1A — “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, and the other documents that we file with the SEC from time to time that could cause our actual results to differ from our current expectations and from the forward-looking statements discussed in this Report.

Many of these risks are beyond our ability to control or predict. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained throughout this Report. Because of these risks, uncertainties, and assumptions, you should not place undue reliance on these forward-looking statements. Furthermore, forward-looking statements speak only as of the date they are made. Except as required under the federal securities laws or the rules and regulations of the SEC, we do not undertake any obligation to update or review any forward-looking information, whether as a result of new information, future events or otherwise.

Overview

We are an established rural local exchange company that provides communications services to residential and business customers in Illinois, Texas, and Pennsylvania. Our main sources of revenues are our local telephone businesses, which offer an array of services, including local dial tone; digital telephone ~~service;~~service (VOIP); custom calling features; private line services; long distance; dial-up ~~Internet~~internet access; high-speed ~~Internet~~broadband internet access, which we refer to as Digital Subscriber Line or DSL; inside wiring service and maintenance; carrier access; billing and collection services; telephone directory publishing; wholesale transport services on a fiber optic network in Texas; and Internet Protocol digital video service, which we refer to as IPTV. We also operate a number of complementary businesses that offer telephone services to county jails and state prisons, operator services, equipment sales, telemarketing, and order fulfillment services.

Acquisition of North Pittsburgh and new credit facility

On December 31, 2007, we completed ~~the~~our acquisition of North Pittsburgh Systems, Inc (“North Pittsburgh”). At the effective time of the merger, 80% of the shares of North Pittsburgh common stock converted into the right to receive $25.00 in cash, without interest, per share, for an approximate total of $300.1 million. Each of the remaining shares of North Pittsburgh common stock converted into the right to receive 1.1061947 shares of our common stock, or an approximate total of 3.32 million shares. The total purchase price, including fees, was $347.0 million, net of cash acquired.

In connection with the acquisition, we, through certain of our wholly-owned subsidiaries, entered into a credit agreement with various financial institutions. The credit agreement ~~provides~~provided for aggregate borrowings of ~~$950.0~~$950 million, consisting of a ~~$760.0~~$760 million term loan facility, a ~~$50.0~~$50 million revolving credit facility (which remains fully available as of ~~June~~September 30, ~~2009)~~2009 and includes a $10 million sub-limit for letters of credit), and a ~~$140.0~~$140 million delayed draw term loan facility. We borrowed ~~$120.0~~$120 million under the delayed draw term loan facility on April 1, 2008, to redeem ~~the~~our then outstanding senior notes. The commitment for the remaining ~~$20.0~~$20 million under the delayed draw facility expired. ~~Other borrowings~~Borrowings under the credit facility were also used to retire our previous ~~$464.0~~$464 million credit facility and to fund the acquisition of North Pittsburgh.

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Redemption of senior notes

On April 1, 2008, we redeemed all of ~~the~~our then outstanding 9.75% senior notes using ~~$120.0~~$120 million borrowed under the delayed draw term loan and cash on hand. The total amount of the redemption was approximately $136.3 million, including a redemption premium of 4.875%, or $6.3 million. We recognized a $9.2 million loss on the redemption of the notes. As a result of the transaction, we expect to realize a $4.0 million reduction in annualized cash interest expense.

Discontinuance of ~~the application of SFAS No. 71, “Accounting~~Accounting for the Effects of Certain Types of ~~Regulation”~~Regulation

Historically, our Illinois and Texas ILEC operations followed the ~~accounting~~FASB’s authoritative guidance for regulated enterprises ~~prescribed by Statement of Financial Accounting Standards No. 71 “Accounting~~in accounting for the ~~Effects~~effects of ~~Certain Types~~certain types of ~~Regulation” (“SFAS No. 71”).~~regulation. This ~~accounting recognizes~~authoritative guidance required the recognition of the economic effects of rate regulation by recording costs and a return on investment as such amounts are recovered through rates authorized by regulatory authorities. ~~Recent changes~~Changes to our ~~operations,~~business, however, have impacted the dynamics of ~~the Company’s business environment and caused us to evaluate the applicability of SFAS No. 71.~~our operating environment. In the last half of 2008, we experienced a significant increase in competition in our Illinois and Texas markets ~~as,~~ primarily ~~our~~due to traditional cable competitors ~~started~~ offering voice services. Also, effective July 1, 2008, we made an election to transition from rate of return to price cap regulation at the interstate level for our regulated Illinois and Texas operations. The conversion to price caps ~~gives us~~provides for greater pricing flexibility, especially in the increasingly competitive special access segment and in launching new products. Additionally, in response to customer demand, we ~~have also~~ launched our own digital telephone service product offering as an alternative to our traditional wireline services. While there ~~has~~have been no material changes in our bundling strategy or in our end-user pricing, ~~our~~the pricing structure is transitioning from being based on the recovery of costs to a pricing structure based on market conditions.

Based on ~~the~~these and other factors impacting our ~~operations,~~business, we determined in ~~the fourth quarter of~~late 2008 that the applicability of the authoritative guidance for regulated enterprises was no longer appropriate in the reporting of our financial results. As a result, we began to apply the authoritative guidance required for the discontinuance of application of SFAS No. 71 for reporting our financial results is no longer appropriate. SFAS No. 101, “Regulated Enterprises — Accounting for the Discontinuance of Application of FASB Statement No. 71,” specifies the accounting required when an enterprise ceases to meet the criteria for application of SFAS No. 71. SFAS No. 101regulatory accounting. This authoritative guidance requires the elimination of the effects of any actions of regulators that ~~have~~had been previously been recognized ~~as assets and liabilities~~ in accordance with ~~SFAS No. 71~~the authoritative guidance for regulated enterprises, but that would not have been recognized ~~as assets and liabilities~~ by nonregulated enterprises. Depreciation rates of certain assets established by regulatory authorities for our telephone operations subject to ~~SFAS No. 71~~the authoritative guidance for regulated enterprises have historically included a systematic charge for removal costs in excess of the related estimated salvage value on those assets, resulting in a net ~~over depreciation~~over-depreciation of those assets over their useful lives. Costs of removal were then appropriately applied against this reserve. Upon discontinuance of ~~SFAS No. 71,~~the authoritative guidance for regulated enterprises, we reversed the impact of recognizing removal costs in excess of the related estimated salvage value, which resulted in recording a non-cash extraordinary gain of approximately $7.2 million, net of taxes of approximately $4.2 million ~~during~~in the three months ended December 31, 2008. Our Pennsylvania ILEC ~~had~~previously discontinued the application of ~~SFAS No. 71~~the authoritative guidance for regulated enterprises prior to our acquisition of North Pittsburgh, and, as a result, was not affected by the change in 2008.

Factors affecting results of operations

Revenues

Telephone Operations and Other Operations.Our revenues are derived primarily from the sale of voice and data ~~communications~~communication services to residential and business customers in our rural telephone companies’ service areas. Because we operate primarily in rural service areas, we do not anticipate significant growth in revenues in our Telephone Operations segment, except through acquisitions such as that of North Pittsburgh. However, we do expect relatively consistent cash flow from year to year because of stable customer demand, and a generally supportive regulatory environment.

Local access lines and bundled services.An “access line” is the telephone line connecting a home or business to the public switched telephone network. The number of local access lines in service directly affects the monthly recurring revenue we generate from end users, the amount of traffic on our network, the access

~~Many rural~~ Most wireline telephone companies have experienced a loss of local access lines due to challenging economic conditions and increased competition from wireless providers, competitive local exchange carriers and, in some cases, cable television operators. We have not been immune to these conditions. In 2008, both Suddenlink and Comcast, cable competitors in Texas, as well as NewWave Communications in Illinois, launched a competing voice product, which ~~caused~~contributed to a spike in our line loss. We estimate that cable companies are now offering voice service to all of their addressable customers, covering 85% of our entire service territory.

We have ~~mitigated~~been able in some instances to offset the decline in local access lines with increased average revenue per access line ~~by focusing on the following:~~by:

	•¨		aggressively promoting DSL service, including selling DSL as a stand-alone offering;

	•¨		value bundling ~~value-adding~~ services, such as DSL or IPTV, with a combination of local service and custom calling features;

	•¨		maintaining excellent customer service standards; and

	•¨		keeping a strong local presence in the communities we serve.

We have implemented a number of initiatives to gain new local access lines and retain existing lines by making bundled service packages more attractive (for example, by adding unlimited long distance) and by announcing special promotions, like discounted second lines. We also market ~~our~~a “triple play” bundle, which includes local telephone service, DSL, and IPTV. As of ~~June~~September 30, 2009, IPTV was available to over ~~152,100~~169,800 homes in our markets. Our IPTV subscriber base has grown from ~~14,112~~15,454 as of ~~June~~September 30, 2008, to ~~19,731~~21,518 as of ~~June~~September 30, 2009. ~~We launched IPTV in our Pennsylvania markets in April 2008.~~ We also continue to experience substantial growth in the number of DSL subscribers we serve. We had ~~95,656,~~97,750, 91,817 and ~~86,575~~89,129 DSL lines in service as of ~~June~~September 30, 2009, December 31, 2008 and ~~June~~September 30, 2008, respectively. Currently over 95% of our rural telephone companies’ local access lines are DSL-capable.

In addition to our access line, DSL and video initiatives, we intend to continue to integrate best practices across our markets. We also continue to look for ways to enhance current products and introduce new services to ensure that we remain competitive and continue to meet our customers’ needs. These initiatives may include offering:

	•¨		hosted digital telephone service in certain Texas and Pennsylvania markets to meet the needs of small- to medium-sized business customers that want robust ~~function~~functionality without having to purchase a traditional key or PBX phone system;

	•¨		Digital telephone service for residential customers, which is being offered to our customers as a growth opportunity and as an alternative to the traditional phone line for customers who are considering a switch to a cable competitor. Since we began to more aggressively promote our digital telephone service in situations in which we are attempting to save or win back customers, we estimate that the product has allowed us to reduce our residential customer loss by 10%.

	•¨		DSL service—even to users who do not have our access line—which expands our customer base and creates additional revenue-generating opportunities;

	•¨		a DSL product with speeds up to 1020 Mbps for those customers desiring greater Internet speed; and

	•¨		High definition video service and digital video recorders in all of our IPTV markets.

We also utilize service bundles, which include combinations of local service, custom calling features, and Internet access, to generate revenue and retain customers. Our service bundles totaled ~~40,589,~~57,508, 42,054 and ~~45,272~~43,902 at ~~June~~September 30, 2009, December 31, 2008 and ~~June~~September 30, 2008, respectively. Service bundles at September 30, 2009 include 17,152 units from our Pennsylvania market. Pennsylvania units are not included in

2223

We have agreements with various carriers to provide long distance transport and termination services. We believe we will meet all of our commitments in these agreements and will be able to procure services for periods after our current agreements expire. We do not expect any material adverse effects from any changes in any new service contract.

Selling, general and administrative expenses. ~~In general, selling,~~Selling, general and administrative expenses include selling and marketing expenses; expenses associated with customer care; billing and other operating support systems; and corporate expenses, such as professional service fees and non-cash ~~stock~~stock-based compensation.

Our Telephone Operations segment incurs selling, marketing, and customer care expenses from ~~its~~our customer service centers and commissioned sales representatives. Our customer service centers are the primary sales channels for customers with one or two phone lines, whereas commissioned sales representatives provide customized systems for larger business customers. In addition, we use customer retail centers for various communications needs, including new telephone, Internet, and IPTV purchases.

Each of our Other Operations businesses primarily uses an independent sales and marketing team comprising field sales account managers, management teams, and service representatives to execute our sales and marketing strategy.

Our operating support and back office systems enter, schedule, provision, and track customer orders; test services and interface with trouble management; and operate inventory, billing, collections, and customer care service systems for the local access lines in our operations. We have migrated most key business processes ~~of our operations~~ onto a single company-wide ~~systems~~system and ~~platforms.~~platform. We hope to improve profitability by reducing individual company costs through centralizing, standardizing, and sharing best practices. We have converted the North Pittsburgh accounting, payroll and ILEC billings functions to our existing systems. Our integration and restructuring expenses were ~~$4.0~~$5.4 million and ~~$2.1~~$3.2 million for the ~~six~~nine months ended ~~June~~September 30, 2009 and ~~June~~September 30, 2008, respectively.

Depreciation and amortization expenses.Prior to ~~the~~our discontinuance of the application of the authoritative guidance on accounting ~~prescribed by SFAS No. 71~~for the effects of certain types of regulation on December 31, 2008 as noted above, we recognized depreciation expenses for our regulated telephone plant using rates and lives approved by the state regulators for regulatory reporting purposes. Upon the discontinuance of ~~SFAS No. 71,~~the application of this authoritative guidance, we revised the useful lives on a prospective basis to be similar to a non-regulated entity.

The provision for depreciation on property and equipment is recorded using the straight-line method based upon the following useful lives:


	Years
Buildings		18-40
Network and outside plant facilities		3-50
Furniture, fixtures and equipment		3-15
Capital Leases		11

Amortization expenses are recognized primarily for our intangible assets considered to have finite useful lives on a straight-line basis. In accordance with ~~SFAS No. 142, “Goodwill and Other Intangible Assets”,~~the applicable authoritative guidance, goodwill and intangible assets that have indefinite useful lives are not amortized but rather are tested annually for impairment. Because tradenames have been determined to have indefinite lives, they are not amortized. Customer relationships are amortized over their useful life. The net carrying value of customer lists at ~~June~~September 30, 2009, is being amortized at a weighted average life of approximately ~~6.0~~5.8 years.

~~For the Three Months Ended June 30, 2009 compared to June 30, 2008~~

~~The following summarizes our revenues and operating expenses on a consolidated basis for the three months ended June 30, 2009 and 2008:~~

Three Months Ended June 30,
2009 2008
% of Total % of Total
$ (millions) Revenues $ (millions) Revenues
Revenues

Telephone Operations
Local calling services $ 24.3 23.8 % $ 26.5 24.9 %
Network access services 22.1 21.7 24.6 23.1
Subsidies 13.4 13.1 13.4 12.6
Long distance services 5.4 5.3 6.3 5.9
Data and internet services 16.7 16.4 15.2 14.3
Other services 9.2 9.0 9.6 9.0

Total Telephone Operations 91.1 89.3 95.6 89.8
Other Operations 10.9 10.7 10.9 10.2

Total operating revenues 102.0 100.0 106.5 100.0

Expenses

Operating expenses
Telephone Operations 52.1 51.1 52.9 49.7
Other Operations 10.1 9.9 10.2 9.6
Depreciation and amortization 21.0 20.6 22.3 20.9

Total operating expenses 83.2 81.6 85.4 80.2

Income from operations 18.8 18.4 21.1 19.8

Interest expense, net (14.5 ) (14.2 ) (16.0 ) (15.0 )
Other income (expense), net 8.5 8.3 (4.6 ) (4.3 )
Income tax expense (5.2 ) (5.0 ) (0.2 ) (0.2 )

Net income 7.6 7.5 0.3 0.3
Less: Net income attributable to noncontrolling interest 0.1 0.1 0.1 0.1

Net income attributable to Consolidated Communications Holdings, Inc. $ 7.5 7.4 % $ 0.2 0.2 %

~~Segments~~

~~In accordance with the reporting requirement of SFAS No. 131, “~~~~Disclosure about Segments of an Enterprise and Related Information~~~~,” we have two reportable business segments, Telephone Operations and Other Operations. The results of operations discussed below reflect our consolidated results.~~

Results of Operations

Segments

We have two reportable business segments, Telephone Operations and Other Operations. The results of operations discussed below reflect our consolidated results.

For the Three Months Ended ~~June~~September 30, 2009 ~~Compared~~compared to ~~June~~September 30, 2008

The following summarizes our revenues and operating expenses on a consolidated basis for the three months ended September 30, 2009 and 2008:


	Three Months Ended September 30,
	2009						2008
				% of Total						% of Total
	$ (millions)			Revenues			$ (millions)			Revenues
Revenues
Telephone Operations
Local calling services	$	24.3			23.9	%	$	26.0			25.0	%
Network access services		20.9			20.6			23.4			22.5
Subsidies		14.5			14.3			13.8			13.3
Long distance services		4.9			4.8			5.8			5.6
Data and internet services		17.4			17.1			16.5			15.9
Other services		9.3			9.2			8.9			8.6

Total Telephone Operations		91.3			89.9			94.4			90.9
Other Operations		10.3			10.1			9.4			9.1

Total operating revenues		101.6			100.0			103.8			100.0

Expenses
Operating expenses
Telephone Operations		52.2			51.4			54.6			52.5
Other Operations		9.6			9.4			9.3			9.0
Depreciation and amortization		21.3			21.0			22.9			22.1

Total operating expenses		83.1			81.8			86.8			83.6

Income from operations		18.5			18.2			17.0			16.4
Interest expense, net		(14.8	)		(14.6	)		(13.6	)		(13.1	)
Other income, net		6.1			6.1			6.0			5.8
Income tax expense		(2.5	)		(2.5	)		(4.3	)		(4.2	)

Net income		7.3			7.2			5.1			4.9
Less: Net income attributable to noncontrolling interest		0.2			0.2			0.1			0.1

Net income attributable to Consolidated Communications Holdings, Inc.	$	7.1			7.0	%	$	5.0			4.8	%

Revenues

Our revenues decreased by ~~4.2%~~2.1% or ~~$4.5~~$2.2 million, to ~~$102.0~~$101.6 million for the three months ended ~~June~~September 30, 2009, from ~~$106.5~~$103.8 million for the three months ended ~~June~~September 30, 2008. Our discussion and analysis of the components of the variance follows:

Telephone Operations Revenues

Local calling servicesrevenues decreased by ~~8.3%~~6.5%, or ~~$2.2~~$1.7 million, to $24.3 million for the three months ended ~~June~~September 30, 2009 compared to ~~$26.5~~$26.0 million for the same period in 2008. The decrease is primarily due to a decline in local access lines as previously discussed under “Factors Affecting Results of Operations.”

Network access servicesrevenues decreased by ~~10.2%~~10.7%, or $2.5 million, to ~~$22.1~~$20.9 million for the three months ended ~~June~~September 30, 2009 compared to ~~$24.6~~$23.4 million for the same period in 2008. Our switched access revenues decreased by ~~$1.6~~$1.7 million of which ~~$1.0~~$0.2 million can be attributed to our price cap rate reduction and the remainder due to declining minutes of use. In addition, subscriber line charge revenue decreased ~~$0.7~~$0.8 million due to access line loss. ~~During 2008,~~

Subsidiesrevenues increased by 5.1%, or $0.7 million, to $14.5 million for the ~~Texas Infrastructure Fund and Local Number Portability surcharge~~three months ended September 30, 2009 compared to $13.8 million for ~~Texas were eliminated, causing~~the same period in 2008. The increase is primarily due to a ~~reduction in our 2009 revenues of approximately~~ $0.5 ~~million. These decreases were offset by a $0.4~~ million increase in ~~special access revenue.~~the interstate common line revenue requirement, a $1.9 million increase in high cost loop support and $1.7 million decrease in the state high cost support subsidy.

~~Subsidies~~~~revenues were $13.4 million for both three month periods ended June 30, 2009 and June 30, 2008.~~

Long distance servicesrevenues decreased by ~~14.3%~~15.5%, or $0.9 million, to ~~$5.4~~$4.9 million for the three months ended ~~June~~September 30, 2009 compared to ~~$6.3~~$5.8 million for the same period in 2008. The decrease is primarily a result of a decline in billable minutes, as customers increasingly shift to our unlimited long distance calling plan. In addition, during the three months ended June 30, 2009, the Company recognized a non-recurring decrease in revenues due to synchronizing the revenue accounting with the successful completion of the PA ILEC billing system conversion.

Data and Internetrevenues increased by ~~9.9%~~5.5%, or ~~$1.5~~$0.9 million, to ~~$16.7~~$17.4 million for the three months ended ~~June~~September 30, 2009 compared to ~~$15.2~~$16.5 million for the same period in 2008. The increase is primarily due to an increase in IPTV, DSL, ~~IPTV~~metro Ethernet and digital telephone subscribers. These increases were partially offset by a decrease in broadband circuit revenue and the erosion of our dial-up Internet base.

Other Servicesrevenues ~~decreased~~increased by ~~4.2%~~4.5%, or $0.4 million, to ~~$9.2~~$9.3 million for the three months ended ~~June~~September 30, 2009 compared to ~~$9.6~~$8.9 million for the same period in 2008. The ~~decrease~~increase was primarily due to ~~decreases~~increases in ~~revenue~~revenues from our directory publishing and transport operations.

Other Operations Revenue

Other Operations revenues ~~were $10.9~~increased by 9.6%, or $0.9 million, to $10.3 million for ~~both~~the three ~~month periods~~months ended ~~June~~September 30, 2009 ~~and June 30,~~compared to $9.4 million for the same period in 2008. ~~Decreased call attempts resulted in a decline of $0.2 million in Operator Services revenues. This decrease was offset by increases in~~Revenue from our telemarketing business and prison systems calling ~~service.~~service increased $1.4 million. These increases were partially offset by a decline of $0.3 million in Operator Services revenue due to a decrease in call attempts and $0.1 million decrease in equipment sales and installation.

Operating Expenses

Our operating expenses decreased by ~~2.6%~~4.3%, or ~~$2.2~~$3.7 million, to ~~$83.2~~$83.1 million for the three months ended ~~June~~September 30, 2009 compared to ~~$85.4~~$86.8 million for the same period in 2008. Depreciation and amortization expenses decreased by ~~$1.3~~$1.6 million for the three months ended ~~June~~September 30, 2009 compared to the same period in 2008. In addition, operating expenses for Telephone Operations decreased ~~$0.8~~$2.4 million ~~and~~offset by a $0.3 million increase in operating expenses for Other ~~Operations decreased $0.1 million.~~Operations. Our discussion and analysis of the components of the variance follows:

Telephone Operations Operating Expense

Operating expenses for Telephone Operations decreased by ~~1.5%~~4.4%, or ~~$0.8~~$2.4 million, to ~~$52.1~~$52.2 million for the three months ended ~~June~~September 30, 2009 compared to ~~$52.9~~$54.6 million for the same period in 2008. Salaries and benefits for the third quarter of 2009 decreased by $2.4 million as compared to the third quarter of 2008 primarily as a result of personnel reductions related to both the continued integration of our North Pittsburgh operations and a company-wide reduction in workforce which occurred earlier in 2009. The cost of services and

products decreased in the third quarter of 2009 by $1.9 million as compared to the same period in 2008. The decrease in cost of services and products is principally due to $1.2 million of costs incurred in 2008 related to the restoration of service as a result of Hurricane Ike. Lower access and interconnect fees, contract labor costs, repair and maintenance expenses and material costs also contributed to the decline in services and product costs in the third quarter of 2009. Incremental increases in pension costs of $1.3 million, integration and severance costs of $0.4 million, and postretirement expenses of $0.2 million also negatively impacted operating expenses in the third quarter of 2009. Severance and integration costs incurred in the third quarter of 2009 totaled $0.8 million as compared to $0.4 million in the third quarter of 2008. The increase in pension expense is primarily the result of the decline in investment balances that occurred in 2008.

Other Operations Operating Expenses

Operating expenses for Other Operations increased by 3.2%, or $0.3 million, to $9.6 million for the three months ended September 30, 2009 compared to $9.3 million for the same period in 2008. Cost of services and products increased by $0.5 million when compared to the same period in 2008. This increase was offset by a $0.2 million decrease in bad debt expense in our Public Services business due to an increase in the use of prepaid calling cards.

Depreciation and Amortization

Depreciation and amortization expenses decreased by 7.0% , or $1.6 million, to $21.3 million for the three months ended September 30, 2009 compared to $22.9 million for the same period in 2008. As mentioned above, the Company discontinued the application of authoritative guidance on accounting for the effects of certain types of regulation in the fourth quarter of 2008. Depreciation expense decreased by $0.6 million for the three months ended September 30, 2009 compared to the same period in 2008 as a result of this accounting change. The remaining decrease in depreciation expense is due to a decline in the depreciable asset base.

Non-Operating Income

Interest Expense, Net

Interest expense, net of interest income, increased by 8.8%, or $1.2 million, to $14.8 million for the three months ended September 30, 2009 compared to $13.6 million for the same period in 2008. During the third quarter of 2008 we entered into $790 million of basis swaps as described in Note 7 to the unaudited condensed consolidated financial statements. The recognition of ineffectiveness on our interest rate swaps created a non-cash benefit of $2.4 million to interest expense in the third quarter of 2008. Excluding the $2.4 million non-cash benefit, interest expense decreased $1.2 million compared to the same period in 2008. The weighed average interest rate on our term loan borrowings is approximately 6.3% as of September 30, 2009 compared to 6.9% as of September 30, 2008.

Other Income, net

Other income, net increased by 1.7%, or $0.1 million, to $6.1 million for the three months ended September 30, 2009 compared to $6.0 million for the same period in 2008. Our wireless partnership investments experienced a $0.3 million increase in income when compared to the same period in 2008. This increase was offset by a $0.2 million decrease in income from the disposal of assets.

Income Taxes

Our provision for income taxes was $2.5 million, with an effective tax rate of 25.5%, for the three months ended September 30, 2009 as compared to $4.3 million, with an effective tax rate of 45.4%, for the three months ended September 30, 2008. We filed 2008 tax returns for the Consolidated Communications Holdings, Inc. consolidated filing group and East Texas Fiber Line during the third quarter of 2009. We filed 2007 tax returns for the Consolidated Communications Holding, Inc. consolidated filing group, East Texas Fiber Line and the North Pittsburgh Systems, Inc. consolidated filing group during the third quarter of 2008. We recognized approximately $0.9 million of tax benefit in the third quarter of 2009 to adjust our 2008

provision to match our 2008 returns, and $0.2 million of tax benefit in the third quarter of 2008 to adjust our 2007 provision to match our 2007 returns. Exclusive of these adjustments, our effective tax rates for the three month periods ended September 30, 2009 and 2008 would have been approximately 34.6% and 47.6%, respectively. The effective tax rate in 2009 is lower than 2008 due to state tax planning and completion of an internal restructuring effective December 31, 2008. Our effective tax rate differs from the federal and state statutory rates primarily due to non-deductible expenses.

Noncontrolling interest

Income attributable to our joint venture owned 63% by the Company and 37% by Eastex Telecom Investments, L.P. was $0.2 million for the three month period ended September 30, 2009 and $0.1 million for the three month period ended September 30, 2008.

For the Nine Months Ended September 30, 2009 Compared to September 30, 2008

The following summarizes our revenues and operating expenses on a consolidated basis for the nine months ended September 30, 2009 and September 30, 2008:


	Nine Months Ended September 30,
	2009						2008
				% of Total						% of Total
	$ (millions)			Revenues			$ (millions)			Revenues
Revenues
Telephone Operations
Local calling services	$	73.3			24.0	%	$	79.5			25.2	%
Network access services		65.0			21.3			72.5			23.0
Subsidies		42.0			13.8			41.0			13.0
Long distance services		15.8			5.2			18.3			5.8
Data and internet services		50.5			16.5			46.1			14.6
Other services		27.5			9.0			27.6			8.7

Total Telephone Operations		274.1			89.8			285.0			90.3
Other Operations		31.2			10.2			30.7			9.7

Total operating revenues		305.3			100.0			315.7			100.0

Expenses
Operating expenses
Telephone Operations		158.5			51.9			159.1			50.4
Other Operations		29.4			9.6			29.9			9.5
Depreciation and amortization		64.0			21.0			68.1			21.6

Total operating expenses		251.9			82.5			257.1			81.5


Income from operations		53.4			17.5			58.6			18.5

Interest expense, net		(43.7	)		(14.3	)		(47.6	)		(15.0	)
Other income, net		19.1			6.3			5.8			1.8
Income tax expense		(10.1	)		(3.4	)		(7.4	)		(2.3	)

Net income		18.7			6.1			9.4			3.0
Less: Net income attributable to noncontrolling interest		0.8			0.2			0.5			0.2

Net income attributable to Consolidated Communications Holdings, Inc.	$	17.9			5.9	%	$	8.9			2.8	%

Revenues

Our revenues decreased by 3.3% or $10.4 million, to $305.3 million for the nine months ended September 30, 2009, compared to $315.7 million for the nine months ended September 30, 2008. Our discussion and analysis of the components of the variance follows:

Telephone Operations Revenues

Local calling servicesrevenues decreased by 7.8% or $6.2 million, to $73.3 million for the nine months ended September 30, 2009 compared to $79.5 million for the same period in 2008. The decrease is primarily due to a decline in local access lines as previously discussed under “Factors Affecting Results of Operations.”

Network access servicesrevenues decreased by 10.3%, or $7.5 million, to $65.0 million for the nine months ended September 30, 2009 compared to $72.5 million for the same period in 2008. Our switched access revenues decreased by $4.7 million, of which $0.6 million can be attributed to our price cap rate reduction and the remainder due to declining minutes of use. In addition, subscriber line charge revenue decreased $1.8 million due to access line loss. During 2008, the Texas Infrastructure Fund and Local Number Portability surcharge for Texas were eliminated, which reduced our 2009 revenues by approximately $1.5 million. These decreases were offset by a $0.4 million increase in special access revenue.

Subsidiesrevenues increased by 2.4% or $1.0 million, to $42.0 million for the nine months ended September 30, 2009 compared to $41.0 million for the same period in 2008. The increase is primarily due to a $0.6 million increase in the interstate common line revenue requirement, a $5.8 million increase in high cost loop support and $5.3 million decrease in the state high cost loop support subsidy.

Long distance servicesrevenues decreased by 13.7% or $2.5 million, to $15.8 million for the nine months ended September 30, 2009 compared to $18.3 million for the same period in 2008. The decrease is primarily a result of a decline in billable minutes, as customers increasingly switch to our unlimited long distance calling plan.

Data and Internetrevenues increased by 9.5%, or $4.4 million, to $50.5 million for the nine months ended September 30, 2009 compared to $46.1 million for the same period in 2008. The increase is primarily due to an increase in IPTV, DSL, metro Ethernet and digital telephone subscribers. These increases were partially offset by a decrease in broadband circuit revenue and the erosion of our dial-up Internet base.

Other Servicesrevenues decreased by 0.1%, or $0.1 million, to $27.5 million for the nine months ended September 30, 2009 compared to $27.6 million for the same period in 2008. The decrease is primarily due to decreases in directory revenue of $0.1 million for the nine months ended September 30, 2009 compared to the same period in 2008.

Other Operations Revenue

Other Operations revenues increased by 1.6%, or $0.5 million, to $31.2 million for the nine months ended September 30, 2009 compared to $30.7 million for the same period in 2008. Revenues from our telemarketing business and prison systems calling service increased $1.5 million and $0.4 million, respectively, for the nine months ended September 30, 2009 when compared to the same period in 2008. These increases were offset by a decrease of $0.9 million from our operator services business when compared to the same period for 2008 as a result of decreased call attempts. In addition, revenue from equipment sales and installation has decreased $0.4 million for the period.

Operating Expenses

Our operating expenses decreased by 2.0%, or $5.2 million, to $251.9 million for the nine months ended September 30, 2009 compared to $257.1 million for the same period in 2008. Our discussion and analysis of the components of the variance follows:

Telephone Operations Operating Expense

Operating expenses for Telephone Operations decreased by 0.1% or $0.6 million, to $158.5 million for the nine months ended September 30, 2009 compared to $159.1 million for the same period in 2008. Salaries and benefits decreased ~~$2.0~~$4.0 million for the nine months ended September 30, 2009 when compared to the ~~second quarter of~~same period in 2008 as a result of decreased headcount that occurred throughout 2008 as the North Pittsburgh operations were further integrated into our legacy ~~operations.~~operations and additional headcount reductions in 2009 as a result of company-wide cost reduction efforts in response to the current economic downturn. In addition, professional fees decreased $1.2 million as a result of a decline in billing integration costs and cost of services and products decreased $2.4 million due to decreases in access and interconnect, ~~costs decreased $0.9 million when compared to the same period in 2008. The~~contract labor, repairs and maintenance and materials. These expense decreases were offset by ~~increases~~a $4.7 million increase in pension expense ~~of $1.5~~and a $2.3 million ~~and~~increase in severance ~~charges of $0.6 million for the three months ended June 30, 2009 when~~payments compared to the same period for 2008. The increase in pension expense is primarily the result of the decline in investment balances that occurred in 2008. Through a voluntary early retirement incentive and an involuntary reduction in workforce, seventy-four employees left the Company during the nine months ended September 30, 2009. As a result of the reductions, we expect to reduce our wages and benefit expense by $6.8 million per year in 2010 and beyond.

Other Operations Operating Expenses

Operating expenses for Other Operations decreased by ~~1.0%,~~1.7% or ~~$0.1~~$0.5 million, to ~~$10.1~~$29.4 million for the ~~three~~nine months ended ~~June~~September 30, 2009 compared to ~~$10.2~~$29.9 million for the same period in 2008. Bad debt expense in our Public Services business decreased ~~$0.1~~$0.7 million due to an increase in the use of prepaid calling cards.

Depreciation and Amortization

Depreciation and amortization expenses decreased by ~~5.8%~~6.0%, or ~~$1.3~~$4.1 million, to ~~$21.0~~$64.0 million for the ~~three~~nine months ended ~~June~~September 30, 2009 compared to ~~$22.3~~$68.1 million for the same period in 2008. As mentioned above, the Company discontinued the application of ~~SFAS No. 71~~authoritative guidance on accounting for the effects of certain types of regulation in the fourth quarter of 2008. Depreciation expense decreased by ~~$0.9~~$2.0 million for the ~~three~~nine months ended ~~June~~September 30, 2009 compared to the same period in 2008 as a result of this accounting change. ~~In addition, the three months ended June 30, 2008 included $0.3 million~~The remaining decrease in depreciation expense ~~for certain computer software which was fully depreciated as of March 31, 2009.~~is due to a decline the depreciable assets base.

Non-Operating Income (Expense)

Interest Expense, Net

Interest expense, net of interest income, decreased by ~~9.4%~~8.2%, or ~~$1.5~~$3.9 million, to ~~$14.5~~$43.7 million for the ~~three~~nine months ended ~~June~~September 30, 2009 compared to ~~$16.0~~$47.6 million for the same period in 2008. During the third quarter of 2008 we entered into $790 million of basis swaps as described in Note 7 to the unaudited condensed consolidated financial statements. The ~~weighed~~recognition of ineffectiveness on our interest rate swaps created a non-cash benefit of $2.4 million to interest expense in the third quarter of 2008. Excluding the $2.4 million non-cash benefit, interest expense decreased $6.3 million compared to the same period in 2008. On April 1, 2008 we redeemed $130 million of senior notes paying 9.75% interest by borrowing $120 million at a rate of approximately 7.0% and using cash on hand. In addition, the weighted average interest rate on our term loan borrowings is approximately 6.3% as of ~~June~~September 30, 2009 compared to 6.9% as of ~~June~~September 30, 2008.

Other Income, net

Other income, ~~(expense),~~ net increased ~~by 284.8% or $13.1~~$13.3 million, to ~~$8.5~~income of $19.1 million for the ~~three~~nine months ended ~~June~~September 30, 2009 compared to ~~a net expense of $4.6~~$5.8 million for the same period in 2008. In connection with the redemption of our senior notes on April 1, 2008, we recognized a loss on extinguishment of debt of $9.2 million, which included a redemption premium of $6.3 million and the write off of unamortized deferred financing costs of $2.9 million. In the second quarter 2009, we recognized a gain of $1.8 million in other income from the reversal of a previously established reserve in excess of the settlement amount of a dispute with Verizon

Pennsylvania, Inc. See Note 1015 to the unaudited condensed consolidated financial statements included herein. Our wireless partnership investments experienced a ~~$1.9~~$3.0 million increase in income when compared to the same period in 2008. These increases were offset by a $0.8 million loss on the disposal of assets.

Income Taxes

Our provision for income taxes was ~~$5.2~~$10.1 million, ~~in 2009 compared to $0.2 million in 2008. Our~~with an effective tax rate ~~was 40.4%~~of 35.1%, for the ~~three~~first nine months of 2009 as compared to $7.4 million, with an effective tax rate of 44.1%, for the first nine months of 2008. We filed 2008 tax returns for the Consolidated Communications Holdings, Inc. consolidated filing group and East Texas Fiber Line during the third quarter of 2009. We filed 2007 tax returns for the Consolidated Communications Holding, Inc. consolidated filing group, East Texas Fiber Line and the North Pittsburgh Systems, Inc. consolidated filing group during the third quarter of 2008. We recognized approximately $0.9 million of tax benefit in the third quarter of 2009 to adjust our 2008 provision to match our 2008 returns, and $0.2 million of tax benefit in the third quarter of 2008 to adjust our 2007 provision to match our 2007 returns. Exclusive of these adjustments, our effective tax rates for the nine month periods ended ~~June~~September 30, 2009 ~~compared to 46.3% for the three months ended June 30, 2008.~~and 2008 would have been approximately 38.2% and 45.2%, respectively. The effective tax rate in 2009 is lower than 2008 due to state tax planning and completion of an internal restructuring effective December 31, 2008. Our effective tax rate differs from the federal and state statutory rates primarily due to non-deductible expenses.

~~Noncontrolling interest~~

~~Income attributable to our joint venture owned 63% by the Company and 37% by Eastex Telecom Investments, L.P. was $0.1 million for both the three month periods ended June 30, 2009 and June 30, 2008.~~

~~For the Six Months Ended June 30, 2009 Compared to June 30, 2008~~

~~The following summarizes our revenues and operating expenses on a consolidated basis for the six months ended June 30, 2009 and June 30, 2008:~~

Six Months Ended June 30,
2009 2008
% of Total % of Total
$ (millions) Revenues $ (millions) Revenues
Revenues

Telephone Operations
Local calling services $ 49.0 24.1 % $ 53.5 25.2 %
Network access services 44.1 21.6 49.1 23.2
Subsidies 27.5 13.5 27.2 12.8
Long distance services 10.9 5.4 12.5 5.9
Data and internet services 33.1 16.2 29.6 14.0
Other services 18.2 8.9 18.7 8.8

Total Telephone Operations 182.8 89.7 190.6 89.9
Other Operations 20.9 10.3 21.3 10.1

Total operating revenues 203.7 100.0 211.9 100.0

Expenses

Operating expenses
Telephone Operations 106.4 52.2 104.5 49.3
Other Operations 19.7 9.7 20.6 9.7
Depreciation and amortization 42.7 21.0 45.2 21.4

Total operating expenses 168.8 82.9 170.3 80.4

Income from operations 34.9 17.1 41.6 19.6

Interest expense, net (29.0 ) (14.2 ) (34.0 ) (16.0 )
Other income (expense), net 13.0 6.3 (0.2 ) (0.1 )
Income tax expense (7.6 ) (3.7 ) (3.1 ) (1.5 )

Net income 11.3 5.5 4.3 2.0
Less: Net income attributable to noncontrolling interest 0.5 0.2 0.4 0.2

Net income attributable to Consolidated Communications Holdings, Inc. $ 10.8 5.3 % $ 3.9 1.8 %

~~Revenues~~

Our revenues decreased by 3.9% or $8.2 million, to $203.7 million for the six months ended June 30, 2009, compared to $211.9 million for the six months ended June 30, 2008. Our discussion and analysis of the components of the variance follows:

~~Telephone Operations Revenues~~

~~Local calling services~~revenues decreased by 8.4% or $4.5 million, to $49.0 million for the six months ended June 30, 2009 compared to $53.5 million for the same period in 2008. The decrease is primarily due to a decline in local access lines as previously discussed under “Factors Affecting Results of Operations.”

~~Network access services~~revenues decreased by 10.2%, or $5.0 million, to $44.1 million for the six months ended June 30, 2009 compared to $49.1 million for the same period in 2008. Our switched access revenues decreased by $3.9 million, of which $1.4 million can be attributed to our price cap rate reduction and the remainder due to declining minutes of use. In addition, subscriber line charge revenue decreased $1.2 million due to access line loss. During 2008, the Texas Infrastructure Fund and Local Number Portability surcharge for Texas were eliminated, which reduced our 2009 revenues by approximately $1.0 million. These decreases were offset by a $1.2 million increase in special access revenue.

~~Subsidies~~revenues increased by 1.1% or $0.3 million, to $27.5 million for the six months ended June 30, 2009 compared to $27.2 million for the same period in 2008. The increase was primarily due to an increase in high cost loop support revenue.

~~Long distance services~~revenues decreased by 12.8% or $1.6 million, to $10.9 million for the six months ended June 30, 2009 compared to $12.5 million for the same period in 2008. The decrease is primarily a result of a decline in billable minutes, as customers increasingly switch to our unlimited long distance calling plan. In addition, during the three months ended June 30, 2009, the Company recognized a non-recurring decrease in revenues due to synchronizing the revenue accounting with the successful completion of the PA ILEC billing system conversion.

~~Data and Internet~~revenues increased by 11.8%, or $3.5 million, to $33.1 million for the six months ended June 30, 2009 compared to $29.6 million for the same period in 2008. The increase is primarily due to an increase in DSL, IPTV and digital telephone subscribers. These increases were partially offset by erosion of our dial-up Internet base.

~~Other Services~~revenues decreased by 2.7%, or $0.5 million, to $18.2 million for the six months ended June 30, 2009 compared to $18.7 million for the same period in 2008. The decrease in primarily due to decreases in directory revenue of $0.4 and transport revenue of $0.2 million for the six months ended June 30, 2009 compared to the same period in 2008.

~~Other Operations Revenue~~

Other Operations revenues decreased by 1.9%, or $0.4 million, to $20.9 million for the six months ended June 30, 2009 compared to $21.3 million for the same period in 2008. Revenue from our operator services business has decreased $0.7 million for the six months ended June 30, 2009 when compared to the same period for 2008 as a result of decreased call attempts. In addition, revenue from equipment sales and installation has decreased $0.2 million for the period. These decreases were offset by increases in our telemarketing business of $0.3 million and our prison systems calling services of $0.2 million for the period.

~~Operating Expenses~~

Our operating expenses decreased by 0.9%, or $1.5 million, to $168.8 million for the six months ended June 30, 2009 compared to $170.3 million for the same period in 2008. Our discussion and analysis of the components of the variance follows:

~~Telephone Operations Operating Expense~~

Operating expenses for Telephone Operations increased by 1.8% or $1.9 million, to $106.4 million for the six months ended June 30, 2009 compared to $104.5 million for the same period in 2008. Pension expense and severance payments increased $3.0 million and $1.9 million, respectively, for the six months ended June 30, 2009 when compared to the same period for 2008. The increase in pension expense is primarily the result of the decline in investment balances that occurred in 2008. Through a voluntary early retirement incentive and an involuntary reduction in workforce, sixty-one non bargained for employees left the company during the six months ended June 30, 2009. As a result of the reductions, we expect to reduce our wages and benefit expense by $5.8 million per year in 2010 and beyond. The expense increases were offset by decreases in salaries and benefits of $3.0 million compared to the second quarter of 2008 as a result of decreased headcount that occurred throughout 2008 as the North Pittsburgh operations were further integrated into our legacy operations.

~~Other Operations Operating Expenses~~

Operating expenses for Other Operations decreased by 4.4% or $0.9 million, to $19.7 million for the six months ended June 30, 2009 compared to $20.6 million for the same period in 2008. Bad debt expense in our Public Services business decreased $0.5 million due to an increase in the use of prepaid calling cards. In addition costs decreased as a result of reduced revenues for certain Other Operations businesses.

~~Depreciation and Amortization~~

Depreciation and amortization expenses decreased by 5.5%, or $2.5 million, to $42.7 million for the six months ended June 30, 2009 compared to $45.2 million for the same period in 2008. As mentioned above, the Company discontinued the application of SFAS No. 71 in the fourth quarter of 2008. Depreciation expense decreased by $1.4 million for the six months ended June 30, 2009 compared to the same period in 2008 as a result of this accounting change. In addition, depreciation expense for certain computer software decreased $0.8 million for the six months ended June 30, 2009 compared to the same period in 2008.

~~Non-Operating Income (Expense)~~

~~Interest Expense, Net~~

Interest expense, net of interest income, decreased by 14.7%, or $5.0 million, to $29.0 million for the six months ended June 30, 2009 compared to $34.0 million for the same period in 2008. On April 1, 2008 we redeemed $130.0 million of senior notes paying 9.75% interest by borrowing $120.0 million at a rate of approximately 7.0% and using cash on hand. In addition, the weighted average interest rate on our term loan borrowings is approximately 6.3% as of June 30, 2009 compared to 6.9% as of June 30, 2008.

~~Other Income (Expense)~~

Other income (expense), net increased $13.2 million, to income of $13.0 million for the six months ended June 30, 2009 compared to an expense of $0.2 million for the same period in 2008. In connection with the redemption of our senior notes, we recognized a loss on extinguishment of debt of $9.2 million, which included a redemption premium of $6.3 million and the write off of unamortized deferred financing costs of $2.9 million. In the second quarter 2009, we recognized $1.8 million in other income from the reversal of a previously established reserve in excess of the settlement amount of a dispute with Verizon Pennsylvania, Inc. See Note 10 to the unaudited condensed consolidated financial statements included herein. Our wireless partnership investments experienced a $2.7 million increase in income when compared to the same period in 2008. These increases were offset by a $0.6 million loss on the disposal of fiber assets.

~~Income Taxes~~

Our provision for income taxes was $7.6 million in 2009 compared to $3.1 million in 2008. Our effective tax rate was 40.0% for the six months ended June 30, 2009 compared to 42.3% for the six months ended June 30, 2008. The effective rate in 2009 is lower than 2008 due to completion of an internal restructuring effective December 31, 2008. Our effective tax rate differs from the federal and state statutory rates primarily due to non-deductible expenses.

Critical Accounting Policies and Use of Estimates

This section provides an update of the accounting estimates and assumptions that were provided in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

Goodwill and other intangible assets

~~SFAS No. 142,~~~~Goodwill~~ The FASB’s accounting guidance related to goodwill and ~~Other Intangible Assets~~,other intangible assets requires us to perform an assessment, at least annually, of the carrying value of goodwill associated with each of our reporting units. The goodwill impairment analysis is a two-step process. The first step is used to identify potential impairment involves comparing each reporting unit’s estimated fair value to its carrying value, including goodwill. We use a discounted cash flow approach to estimate the fair value of our reporting units. Management judgment is required in developing the assumptions for the discounted cash flow model. These assumptions include primarily revenue growth rates, profit margins, expense growth rates, future capital expenditures, working capital needs, discount rates and perpetual growth rates. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is not impaired. If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment.

The second step of the process involves the calculation of an implied fair value of goodwill for each reporting unit for which step one indicated potential impairment. The implied fair value of goodwill is determined by deducting the estimated fair value of all assets and liabilities of the reporting unit, determined based on a hypothetical purchase price allocation, from the fair value of the reporting unit determined in step one. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded to write down the carrying value of goodwill to the implied fair value.

In 2008 and the preceding years, we considered our reporting units to be the Telephone Operations services in our Illinois ILEC territory, Telephone Operations services in our Texas ILEC territories, Telephone Operations services in our Pennsylvania ILEC territory, Pennsylvania CLEC Operations and each of the companies in our Other Operations Segment, which includes Prison Systems, Business Systems, Operator Services and Market Response (Telemarketing & Fulfillment).

Beginning in 2009, after undergoing an internal legal entity restructuring and completing the final stages of fully integrating our Texas, Illinois and Pennsylvania operations, we have re-evaluated our

reporting units based on how the businesses are being managed. Currently, segment management evaluates the operations of the telephone operations segment on a consolidated basis rather than at the geographic level. In general, product managers and cost managers are responsible for managing costs and services across territories rather than treating the territories as separate business. Further, upon finalizing substantive integration efforts, the Illinois, Texas and Pennsylvania telephone operations can no longer be easily separated. These operations share research and development, network operations monitoring, call routing, remittance, customer service and billing systems. In addition, the Pennsylvania territories receive their video programming from a video head-end located in the Illinois territory and all of the networks provide redundancy. As such, a substantial portion of the assets could not be sold individually without incurring substantial cost to separate processes, systems and technologies. As a result, beginning in 2009, we will combine the Telephone Operations of our Illinois, Texas and Pennsylvania territories and our Pennsylvania CLEC operations into a single reporting unit, Telephone Operations.

Accordingly, in 2009, our reporting units consist of Telephone Operations and the companies in the Other Operations Segment. Had the individual telephone operations territories been aggregated when goodwill was last tested on November 30, 2008, the results of the testing would not have changed.

Following our $6.1 million impairment of goodwill in our Market Response reporting unit in the fourth quarter of 2008, neither Operator Services nor Market Response has a remaining goodwill balance. The carrying value of the goodwill by reporting unit as of ~~June~~September 30, 2009 is:


Telephone operations	$	$519.5	million
Prison Systems	$	$ 0.2	million
Business Systems	$	$ 0.8	million

We perform our annual assessment of the carrying value of goodwill as of November 30 of each year, or more frequently if circumstances arise which would indicate a reduction in the fair value of a reporting unit has more likely than not been reduced below its carrying value. As of November 30, 2008, we determined the estimated fair value of each of our reporting units using a discounted cash flow model, which indicated the carrying value of goodwill was not impaired for each of our reporting units, except Market Response. Based on the results of our step two analysis, a charge of $6.1 million was recorded in the fourth quarter of 2008 to write-off the remaining goodwill of this reporting unit as the carrying value exceeded the implied fair value of goodwill as of the testing date.

The discount rate, sales growth and profitability assumptions are the material assumptions utilized in the discounted cash flow model used to estimate the fair value of each reporting unit. The discount rate is an after-tax weighted average cost of capital (“WACC”). The WACC is calculated based on observable market data. Some of this data (such as the risk free or treasury rate and the pretax cost of debt) are based on the market data at a point in time. Other data (such as beta and the equity risk premium) are based upon market data over time. Sales growth rates and profitability assumptions are aligned with our long-term strategic planning process and reflect the best estimate of future results based on all information available to us at the assessment date.

The WACC used to develop our discounted cash flow model was approximately 9.0% for November, 30, 2008, compared to 7.5% as of November 30, 2007. In general, the conditions in the capital markets caused our estimate of the market rate for the after-tax cost of our bank debt to increase by just over 200 basis points and our estimated cost of equity to increase by just over 100 basis points.

The discounted cash flow valuation model used in our impairment assessment involves numerous assumptions, as noted above. While economic conditions applicable at the time of the valuation indicate the combination of assumptions utilized in the valuations are reasonable, as market conditions change so will the assumptions, with a resulting impact on the valuation and consequently a potential impairment charge. At November 30, 2008, increasing the WACC to 11% or decreasing the estimated fair value of each reporting unit by 5% would not have indicated a potential impairment, exclusive of Market Response. In addition, the sum of the individual reporting ~~units~~units’ estimated fair value when using an 11% WACC would imply a control premium

of approximately 22% above our market capitalization as of November 30, 2008, which we believe is reasonable.

For the years ended December 31, 2008, 2007 and 2006, our Telephone Operations revenues increased by 31.8%, 2.3% and (0.7%), respectively, for an 11.1% average annual growth rate. In developing our income model, ~~the Company~~we considered this data and assumed annual growth in revenues of 1%, which we believe is conservative, but not inconsistent with our stable and slightly increasing historical revenue pattern of approximately 1.5% per year excluding the significant revenue growth associated with the acquisition of North Pittsburgh. At the same time, we assumed slightly declining gross margins in the short term as higher margin revenues generated from local access lines are being replaced by slightly lower margin revenues from DSL, IPTV, VOIP and other products. In light of the current economic and competitive environment in our markets, we reduced our estimate for 2009 revenue and cash flows with a return to modestly increasing annual revenue growth rates in 2010 and beyond. Despite the reduced revenue estimate for 2009, we believe that a return to modest growth in 2010 and beyond is reasonable since the effects of the launch of competitive voice products by cable companies in certain of our territories in 2008 is expected to have moderated based on historical precedent in our other territories. In the course of operating the business, management would intend to largely offset any unexpected revenue declines with proportional reductions in selling, general and administrative expenses. However, if we were unable to implement adequate cost reduction measures and all other material inputs in our income model were to remain constant, our revenues could decline by over 1.5% annually without triggering a goodwill impairment charge.

Liquidity and Capital Resources

~~General~~Outlook and Overview

~~Historically,~~ The following table sets forth selected information concerning our financial condition.


	September 30,		December 31,
(In thousands)	2009		2008
Cash and cash equivalents	$	31,883	$	15,471
Working capital		27,343		7,284
Total debt		880,581		881,266
Current ratio		1.38		1.10

Our operating requirements have historically been funded from cash ~~flow~~flows generated from our business and borrowings under our credit facilities. As of June 30, 2009, we had $880.8 million of debt, including capital leases. Our $50.0 million revolving line of credit, however, remains unused. On April 1, 2008 we redeemed our $130.0 million of outstanding senior notes. The redemption, including the payment of the redemption premium of $6.3 million, accrued interest through the redemption date and the associated fees, was funded using $120.0 million of proceeds from our delayed draw term loan (“DDTL”) facility and cash on hand. In the second quarter of 2008, we recognized a loss on redemption of the senior notes of $9.2 million, which included the redemption premium and the write off of unamortized deferred financing costs associated with the senior notes.

We expect that our future operating requirements will continue to be funded from cash ~~flow~~flows generated from our business and, if needed, from borrowings under our revolving credit facility.

As a general matter, we expect that our liquidity needs infor the remainder of 2009 will arise primarily from: (i) ~~expected~~a dividend ~~payments~~payment of ~~$45.9 million, reflecting quarterly dividends at an annual rate of $1.5495 per share;~~$11.5 million; (ii) interest payments on our indebtedness of ~~$56.0 million to $57.5~~approximately $14.1 million; (iii) capital expenditures of approximately ~~$41.0 million to $42.0~~$11.0 million; (iv) cash income tax payments; (v) pension plan contributions of approximately ~~$11.0~~$0.7 million; and (vi) certain other costs. In addition, we may use cash and incur additional debt to fund selective acquisitions. However, our ability to use cash may be limited by our other expected uses of cash, including our dividend policy, and our ability to incur additional debt will be limited by our existing and future debt agreements.

We believe that cash ~~flow~~flows from operating activities, together with our existing cash and borrowings available under our revolving credit facility, will be sufficient for approximately the next twelve months to fund our currently anticipated uses of cash. After that, our ability to fund these expected uses of cash and to comply with the financial covenants under our debt agreements will depend on the results of future operations, performance and cash flow. Our ability to do so will be subject to prevailing economic conditions and to financial, business, regulatory, legislative and other factors, many of which are beyond our control.

We may be unable to access the cash ~~flow~~flows of our subsidiaries since certain of our subsidiaries are parties to credit or other borrowing agreements, or subject to statutory or regulatory restrictions, that restrict the

payment of dividends or making intercompany loans and investments, and those subsidiaries are likely to continue to be subject to such restrictions and prohibitions for the foreseeable future. In addition, future agreements that our subsidiaries may enter into governing the terms of indebtedness may restrict our subsidiaries’ ability to pay dividends or advance cash in any other manner to us.

To the extent that our business plans or projections change or prove to be inaccurate, we may require additional financing or require financing sooner than we currently anticipate. Sources of additional financing may include commercial bank borrowings, other strategic debt financing, sales of nonstrategic assets, vendor financing or the private or public sales of equity and debt securities. There can be no assurance that we will be able to generate sufficient cash ~~flow~~flows from operations in the future, that anticipated revenue growth will be realized, or that future borrowings or equity issuances will be available in amounts sufficient to provide adequate sources of cash to fund our expected uses of cash. Failure to obtain adequate financing, if necessary, could require us to significantly reduce our operations or level of capital expenditures which could have a material adverse effect on our financial condition and the results of operations.

In recent months liquidity in the capital markets has become scarce and in many cases commercial banks have been reluctant to lend money. As discussed below, our term loan has been fully funded at a fixed spread above LIBOR and we have ~~$50.0~~$50 million available under our revolving credit facility. Based on our discussion with banks participating in the bank group, we expect that the funds will be available under the revolving credit facility if necessary.

Sources of Liquidity

~~The following table summarizes~~ Our current principal sources of liquidity are cash, cash equivalents, working capital, cash available under our ~~sources~~secured revolving credit facility, and ~~uses of~~ cash ~~for the periods presented:~~provided by operations.

Six Months Ended
June 30,
2009 2008
(In millions)
Net Cash Provided by (Used for):

Operating activities $ 48.0 $ 42.2
Investing activities (20.1 ) (26.3 )
Financing activities (23.4 ) (39.8 )

~~Operating Activities~~Cash and cash equivalents

~~Net income adjusted for non-cash charges is our primary source of operating cash.~~. For the ~~six~~first nine months ~~ended June 30,~~of 2009, ~~net income adjusted for non-cash charges generated $56.7~~cash and cash equivalents increased by $16.4 million ~~of operating cash. Our major use of operating cash was contributions of $9.1~~as compared to decreasing by $21.9 million ~~to our pension plans.~~

For the six months ended June 30, 2008, net income adjusted for non-cash charges generated $54.9 million of operating cash. Many of our annual cash expenditures for accruals and prepayments were paid in the first ~~six~~nine months ~~including incentive bonus payments~~ of ~~$3.5 million, insurance payments~~2008. Cash and cash equivalents as of ~~$2.4~~September 30, 2009 and December 31, 2008 were $31.9 million and ~~property tax payments~~$15.5 million, respectively.

Cash provided by operations. Net cash provided by operating activities in the first nine months of ~~$4.8 million. In addition, we paid $5.6~~2009 was $82.2 million, ~~for federal~~as compared to cash provided by operating activities of $66.6 million in the first nine months of 2008. Cash provided by operations in 2009 increased primarily as a result of increased cash provided from our wireless partnerships, and ~~state income taxes. Changes in components of~~ working capital changes, primarily accrued expenses, accounts receivable and accounts ~~payable,~~payable.

Working capital. Our net working capital position increased $20.0 million in the ~~ordinary course~~first nine months of ~~business accounted for the remainder~~2009 as a result of ~~the~~ cash ~~flow from operations~~.generated by operations.

~~Investing Activities~~Cash available under our secured revolving credit facility. At September 30, 2009, we had no borrowing outstanding under our secured revolving credit facility and $50 million of availability (see a more detail description of our secured revolving credit facility below).

~~Cash used in investing activities has traditionally been for~~Uses of Liquidity

Our principal uses of liquidity are dividend payments, interest expense and other payments on our debt, capital expenditures and ~~acquisitions. For~~payments made to fund our pension and other postretirement obligations.

Dividend payments. During the ~~six~~first nine months ~~ending June 30,~~of 2009, we used ~~$20.4~~$34.5 million ~~for capital expenditures and received proceeds~~ of ~~$0.3~~cash to make dividend payments to shareholders. During the first nine months of 2008, we used $34.1 million ~~for the sale~~ of ~~certain assets. We expect our capital expenditures for 2009 will be $41.0 million~~cash to ~~$42.0 million, which will be used primarily~~make dividend payments to ~~maintain and upgrade our network, central offices~~shareholders. Our current annual dividend rate is $1.55 per share.

Interest and other ~~facilities and information technology for operating support and other systems.~~

~~Financing Activities~~payments related to outstanding debt

. During the ~~six~~first nine months ~~ended June 30,~~of 2009, we used ~~$23.4~~$42.1 million of cash ~~for financing activities. The major usage was $22.8 million of dividend payments, which is consistent with our 2008 levels. In addition, we made $0.5 million of principal~~to make required interest payments on our outstanding debt. We also used $0.7 million of cash in the first nine months of 2009 to reduce our capital lease obligations.

Pension and postretirement obligations ~~during~~. In the ~~six~~first nine months ~~ended June 30, 2009.~~of 2009, we used $14.1 million of cash to fund pension, 401(k) and other postretirement obligations.

Capital expenditures. During the first nine months of 2009, we spent approximately $31.0 million on capital projects.

Debt

The following table summarizes our indebtedness as of ~~June~~September 30, 2009:

Debt and Capital Leases as of ~~June~~September 30, 2009
(In Millions)

Balance

Maturity Date

Rate (1)

Balance

Maturity Date

Rate (1)

Capital lease

0.8

April 12, 2010

7.40

0.6

April 12, 2010

7.40%

Revolving credit facility

—

December 31, 2013

LIBOR + 2.75%

December 31, 2013

LIBOR + 2.75%

Term loan

880.0

December 31, 2014

LIBOR + 2.50%

880.0

December 31, 2014

LIBOR + 2.50%


(1)		As of ~~June~~September 30, 2009, the 1-month LIBOR rate in effect on our borrowings was ~~0.31%~~0.25%.

Credit Facilities

Borrowings under our credit facilities are our senior, secured obligations that are secured by substantially all of the assets of the borrower, Consolidated Communications, Inc., and the guarantors (the Company and each of the existing subsidiaries of Consolidated Communications, Inc. other than Illinois Consolidated Telephone Company, and certain future subsidiaries). The credit agreement contains customary affirmative covenants, which require us and our subsidiaries to furnish specified financial information to the lenders, comply with applicable laws, maintain our properties and assets and maintain insurance on our properties, among others, and contains customary negative covenants which restrict our and our subsidiaries’ ability to incur additional debt and issue capital stock, create liens, repay other debt, sell assets, make investments, loans, guarantees or advances, pay dividends, repurchase equity interests or make other restricted payments, engage in affiliate transactions, make capital expenditures, engage in mergers, acquisitions or consolidations, enter into sale-leaseback transactions, amend specified documents, enter into agreements that restrict dividends from subsidiaries and change the business we conduct. In addition, the credit agreement requires us to comply with specified financial ratios that are summarized below under “—Covenant Compliance”.

As of ~~June~~September 30, 2009, we had no borrowings outstanding under the revolving credit facility. Borrowings under our credit facilities bear interest at a rate equal to an applicable margin plus, at the borrowers’ election, either a “base rate” or LIBOR. As of ~~June~~September 30, 2009, the applicable margin for interest rates was 2.50% per year for the LIBOR based term loan and 2.75% for the revolving credit facility. The applicable margin for alternative base rate loans was 1.50% per year for the term loan and 1.75% for the revolving credit facility. ~~At June~~For the third quarter ended September 30, 2009, the weighted average interest rate ~~including swaps,~~incurred on our credit facilities, including the effect of our interest rate swaps, was ~~6.27%~~6.26% per annum.

On April 1, 2008 we redeemed all of our then outstanding senior notes in part utilizing ~~$120.0~~$120 million of borrowings under the DDTL provision of our credit facility. The ability to utilize the DDTL for additional borrowings expired on May 1, 2008. The relevant terms of the DDTL are the same as our term loan.

Derivative Instruments

As of ~~June~~September 30, 2009, we had ~~$740.0~~$680 million of notional amount of floating to fixed interest rate swap agreements outstanding and ~~$740.0~~$680 million of notional amount of basis ~~swaps. Approximately 84.1% of our floating rate term loans were fixed through interest rate~~ swaps ~~as of June 30, 2009.~~outstanding. Under the floating to fixed swap agreements, we receive 3-month LIBOR-based interest payments from the swap counterparties and pay a fixed rate. Under the basis swaps, we pay 3-month LIBOR-based payments less a fixed percentage to the

basis swap counterparties, and receive 1-month LIBOR. Concurrent with the execution of the basis swaps, we began electing 1-month LIBOR resets on our credit facility. The swaps are in place to hedge the change in overall cash flows related to our term loan, the driver of which is changes in the underlying variable interest rate. ~~Our objective is to have between 75% and 85%~~The terms of our ~~variable~~credit agreement require us to maintain a minimum fixed to floating ratio of 50%. During the third quarter of 2009, the percentage of our floating-rate term debt that was fixed as a result of the interest rate ~~debt fixed so there is some certainty to our cash flow streams.~~swap agreements averaged 84.1%. The maturity dates of these swaps are laddered to minimize any potential exposure to unfavorable rates when an individual swap expires. The swaps expire at various times through March 31, 2013, and have a weighted average fixed rate of approximately 4.43%. The current effect of the swap portfolio is to fix our cash interest payments on ~~$740.0~~$680 million of floating rate debt at a rate of ~~6.27%~~6.26%, including our borrowing margin of 2.50% over LIBOR as discussed above.

Covenant Compliance

In general our credit agreement restricts our ability to pay dividends to the amount of our Available Cash accumulated after October 1, 2005, plus $23.7 million and minus the aggregate amount of dividends paid after July 27, 2005. Available Cash for any period is defined in our credit facility as Consolidated EBITDA (a) minus, to the extent not deducted in the determination of Consolidated EBITDA, (i) non-cash dividend income for such period; (ii) consolidated interest expense for such period net of amortization of debt issuance costs incurred (A) in connection with or prior to the consummation of the acquisition of North Pittsburgh or (B) in connection with the redemption of our then outstanding senior notes; (iii) capital expenditures from internally generated funds; (iv) cash income taxes for such period; (v) scheduled principal payments of Indebtedness, if any; (vi) voluntary repayments of indebtedness, mandatory prepayments of term loans and net increases in outstanding revolving loans during such period; (vii) the cash costs of any extraordinary or unusual losses or charges; and (viii) all cash payments made on account of losses or charges expensed prior to such period (b) plus, to the extent not included in Consolidated EBITDA, (i) cash interest income; (ii) the cash amount realized in respect of extraordinary or unusual gains; and (iii) net decreases in revolving loans. Based on the results of operations from October 1, 2005 through ~~June~~September 30, 2009, and after taking into consideration dividend payments (including the $11.4 million dividend declared in August 2009 and paid on November 1, 2009), we ~~would~~continue to have ~~been able to pay a~~$91.4 million in dividend ~~of $94.5 million~~availability under the credit facility covenant. ~~After giving effect to the dividend of $11.4 million which was declared in May 2009 and paid on August 1, 2009, we could pay a dividend of $83.1 million under the credit facility covenant.~~

Under our credit agreement, if our total net leverage ratio (as such term is defined in the credit agreement), as of the end of any fiscal quarter, is greater than 5.10:1.00, we will be required to suspend dividends on our common stock unless otherwise permitted by an exception for dividends that may be paid from the portion of proceeds of any sale of equity not used to make mandatory prepayments of loans and not used to fund acquisitions, capital expenditures or make other investments. During any dividend suspension period, we will be required to repay debt in an amount equal to 50.0% of any increase in available cash (as such term is defined in our credit agreement) during such dividend suspension period, among other things. In addition, we will not be permitted to pay dividends if an event of default under the credit agreement has occurred and is continuing. Among other things, it will be an event of default if our interest coverage ratio as of the end of any fiscal quarter is below 2.25:1.00. As of ~~June~~September 30, 2009, our total net leverage ratio was ~~4.88:~~4.79:1.00 and our interest coverage ratio was ~~3.03:~~2.99:1.00.

The description of the covenants above and of our credit agreement generally in this Report are summaries only. They do not contain a full description, including definitions, of the provisions summarized. As such, these summaries are qualified in their entirety by these documents, which are filed as exhibits to our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

Dividends

The cash required to fund dividend payments is in addition to our other expected cash needs, both of which we expect to be funded with cash flows from operations. In addition, we expect we will have sufficient availability under our revolving credit facility to fund dividend payments in addition to any expected fluctuations in working capital and other cash needs, although we do not intend to borrow under this facility to pay dividends.

We believe that our dividend policy will limit, but not preclude, our ability to grow. If we continue paying dividends at the level currently anticipated under our dividend policy, we may not retain a sufficient amount of cash, and may need to seek refinancing, to fund a material expansion of our business, including any significant acquisitions or to pursue growth opportunities requiring capital expenditures significantly beyond our current expectations. In addition, because we expect a significant portion of cash available will be distributed to holders of common stock under our dividend policy, our ability to pursue any material expansion of our business will depend more than it otherwise would on our ability to obtain third-party financing.

Surety Bonds

In the ordinary course of business, we enter into surety, performance, and similar bonds. As of ~~June~~September 30, 2009, we had approximately $2.1 million of these bonds outstanding.

Recent Accounting Pronouncements

In June ~~2008,~~2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2009-01,Generally Accepted Accounting Principles,which establishes the FASB ~~Staff Position~~Accounting Standards Codification (“~~FSP”~~the Codification”) ~~No. EITF 03-6-1 “Determining Whether Instruments Granted in Share-Based Payment Transactions~~as the official single source of authoritative U.S. generally accepted accounting principles (“GAAP”). All existing accounting standards are Participating Securities”. This FSP, which became effective January 1, 2009, provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and should besuperseded. All other accounting guidance not included in the ~~computation of earnings per share pursuant to~~Codification will be considered non-authoritative. The Codification also includes all relevant Securities and Exchange Commission (“SEC”) guidance organized using the ~~two-class method. As~~same topical structure in separate sections within the ~~Company’s restricted shares are considered participating securities because they entitle holders to receive nonforfeitable dividends during~~Codification.

Following the vesting term, the Company applied the two-class method of computing basic and diluted earnings per share for all periods presented. The FSP had no effect on its results of operations and financial condition, or on basic or diluted earnings per share.

~~In March 2008,~~Codification, the FASB ~~issued Statement~~will not issue new standards in the form of ~~Financial~~Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards ~~No. 161~~Updates (“~~SFAS No. 161”~~ASU”)~~, “Disclosure about Derivative Instruments and Hedging Activities—an Amendment of FASB Statement No. 133”. SFAS No. 161 requires entities that utilize derivative instruments~~ which will serve to update the Codification, provide qualitative disclosures about their objectives and strategies for using such instruments, as well as any details of credit-risk-related contingent features contained within derivatives. SFAS No. 161 also requires reporting entities to disclose additionalbackground information about the ~~amounts~~guidance and ~~location of derivatives within~~provide the basis for conclusions on the changes to the Codification.

The Codification is not intended to change GAAP, but it will change the way GAAP is organized and presented. The Codification is effective for our third-quarter 2009 financial statements ~~how the provisions of Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” have been applied,~~ and the principal impact ~~that hedges have~~ on our financial statements is limited to disclosures as all future references to authoritative accounting literature will be referenced in accordance with the ~~entity’s financial position, financial performance, and cash flows. The Company has adopted SFAS No. 161 effective January 1, 2009.~~Codification.

items have on an entity’s financial position, financial performance, and cash flows. This guidance was effective for financial statements issued for fiscal years and interim periods beginning on or after November 15, 2008. Adoption of this guidance on January 1, 2009 did not have a material impact on our financial position or results of operations (see Note 7 to the unaudited condensed consolidated financial statements).

~~In December 2008, the FASB issued FSP SFAS 132(R)-1 (“SFAS 132(R)-1”),“Employers’ Disclosures about Postretirement Benefit Plan Assets” which provides~~ This guidance on an employer’s disclosures about plan assets of a defined benefit pension and other postretirement plan. SFAS 132(R)-1 requires employers to disclose the fair value of each major category of plan assets as of each annual reporting date for which a statement of financial position is presented; the inputs and valuation technique used to develop fair value measurements of plan assets at the annual reporting date, including the level within the fair value hierarchy in which the fair value measurements fall as defined by SFAS No. 157 (“SFAS No. 157”), “Fair Value Measurements,” investment policies and strategies, including target allocation percentages; and significant concentrations of risk in plan assets. SFAS 132(R)-1 is effective for ~~fiscal years~~interim or annual financial periods ending after ~~December~~June 15, ~~2009 and will~~2009. Adoption of this guidance did not have an impact on ~~future~~our consolidated results of operations or financial position (see Note 16 to the unaudited condensed consolidated financial statements).

3739


~~Item 3.~~		~~Quantitative and Qualitative Disclosures about Market Risk~~

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk from changes in interest rates. Market risk is the potential loss arising from adverse changes in market interest rates on our ~~long-term debt~~variable rate obligations. We estimate our market risk using sensitivity analysis. Market risk is defined as the potential change in the fair market value of a fixed-rate long-term debt obligation due to hypothetical adverse change in interest rates andcalculate the potential change in interest expense ~~on variable rate long-term debt obligations due to a change~~caused by changes in market interest ~~rates. The fair value on long-term debt obligations is determined based on discounted cash flow analysis, using the~~ rates ~~and the maturities of these obligations compared to terms and rates currently available in long-term debt markets. The potential change in interest expense is determined~~ by ~~calculating~~determining the effect of the hypothetical rate increase on the portion of our variable rate debt that is not hedged through the interest rate swap ~~agreements described below and assumes no changes in our capital structure. As~~agreements.

During the first nine months of ~~June 30,~~ 2009, the interest rate on approximately ~~84.1%~~$140 million of our ~~long-term~~floating rate debt ~~obligations were variable rate obligations subject to~~was not fixed through the use of interest rate ~~swap agreements and approximately 15.9% were variable rate obligations not subject to interest rate swap agreements.~~

As of June 30, 2009, we had $880.0 million of debt outstanding under our credit facilities. Our exposure to fluctuations in interest rates was limited by interest rate swap agreements that effectively converted aswaps, thereby subjecting this portion of our ~~variable rate~~ debt to ~~a fixed-rate basis, thus reducing the impact of~~potential changes in interest rate changes on future interest expenses. On June 30, 2009, we had interest rate swap agreements covering $740.0 million of aggregate principal amount of our variable rate debt at fixed LIBOR rates ranging from 3.87% to 4.89% and expiring on various dates through March 31, 2013. In addition, we had $740.0 million of basis swap agreements under which we make 3-month LIBOR payments less a percentage ranging from 5.4 to 9.0 basis points, and receive 1-month LIBOR.

~~As of June 30, 2009, we had $140.0 million of variable-rate debt not covered by interest rate swap agreements.~~rates. If market interest rates changed by 1.0% from the average rates that prevailed during the first nine months of this year, interest expense would have increased or decreased by approximately ~~$0.7~~$1.1 million for ~~the~~this nine period.

As of ~~June~~September 30, 2009, the fair value of interest rate swap agreements amounted to a liability of ~~$23.5~~$23.6 million, net of taxes, which is recognized as a deferred loss within accumulated other comprehensive income.


~~Item 4.~~		~~Controls and Procedures~~

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. ~~Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.~~ Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of ~~June~~September 30, 2009. Based upon that evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective. No change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during our fiscal quarter ended ~~June~~September 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

3940

PART II. OTHER INFORMATION


~~Item 1.~~		~~Legal Proceedings~~

Item 1. Legal Proceedings

On April 15, 2008, Salsgiver Inc., a Pennsylvania-based telecommunications company, and certain of its affiliates filed a lawsuit against us and our subsidiaries North Pittsburgh Telephone Company and North Pittsburgh Systems Inc. in the Court of Common Pleas of Allegheny County, Pennsylvania, alleging that we have prevented Salsgiver from connecting its fiber optic cables to North Pittsburgh’s utility poles. Salsgiver seeks compensatory and punitive damages as the result of alleged lost projected profits, damage to its business reputation, and other costs. It claims to have sustained losses of approximately $125 million, but does not request a specific dollar amount in damages. We believe that these claims are without merit and, regardless of the merit of the claims, the damages are completely unfounded. We intend to defend against these claims vigorously. In the third quarter of 2008 we filed preliminary objections and responses to Salsgiver’s complaint; however, the court ruled against our preliminary objections. On November 3, 2008 we responded to Salsgiver’s amended complaint and filed a counter claim for trespass due to attaching to our poles without an authorized agreement and in an unsafe manner. We do not believe that these claims will have a material adverse ~~effect~~impact on our ~~results of operations or~~ financial ~~condition.~~results.

On October 23, 2006, Verizon Pennsylvania, Inc. and several of its affiliates filed a formal complaint with the Pennsylvania Public Utility Commission claiming that our Pennsylvania CLEC’s intrastate switched access rates violate Pennsylvania law. On July 10, 2009, we entered into a settlement agreement with Verizon. See Note 1015 to the condensed consolidated financial statements included herein.

~~In addition, we currently~~ Each of the two matters described above was previously described in the Company’s Form 10-Q for the quarters ended March 31, 2009 and June 30, 2009.

We are ~~and~~ from time to time ~~may be, subject to additional claims~~involved in various legal proceedings and regulatory actions arising ~~in the ordinary course~~out of ~~business.~~our operations. We are not ~~currently subject to~~involved in any ~~such claims~~legal or regulatory proceedings, individually or in the aggregate (other than those described herein), that we believe ~~could reasonably be expected to~~would have a material adverse effect onupon our business, operating results ~~of operations~~ or financial condition.


~~Item 4.~~		~~Submission of Matters to a Vote of Security Holders~~

Item 5. Other Information.

~~We held our Annual Meeting~~ On November 2, 2009, the Board of ~~Stockholders on May 5, 2009,~~Directors of the Company adopted amendments to the Company’s Amended and Restated Bylaws (the “Bylaws”). The amendments to the existing Bylaws took effect immediately upon adoption by the Board of Directors. A complete copy of the Bylaws, as amended, is attached to this Form 10-Q as Exhibit 3.1. Specifically, Article II, Section 2.02 of the Bylaws was amended to, among other things:

(i) expand the disclosure a stockholder must provide, under the Company’s advance notice bylaw, when submitting a proposal for consideration or nominating a candidate or candidates for election as directors at a meeting of stockholders, to include, among other things, disclosure of derivative transactions in the Company’s stock and arrangements among the proposer, stockholders and other associated persons;

(ii) provide that the stockholder notice provisions of Article II, Section 2.02 shall be the exclusive means for a stockholder to bring business before any meeting of stockholders, or to nominate persons for elections as directors at any stockholders meeting duly called for the ~~purpose~~election of ~~electing one~~directors; and

(iii) clarify that any public announcement of a postponement of an annual meeting shall not commence a new time period for the giving of a stockholder’s notice regarding proposals or director nominations.


	Pension Benefits						Other Benefits						Pension Benefits						Other Benefits
	2009			2008			2009			2008
Three months ended June 30,
(In thousands)													2009			2008			2009			2008
Three months ended September 30,
Service cost	$	527		$	545		$	216		$	252		$	527		$	498		$	177		$	170
Interest cost		2,789			2,806			580			632			2,789			2,837			450			552
Expected return on plan assets		(2,356	)		(3,255	)		—			—			(2,355	)		(3,008	)		—			—
Amortization prior service cost		(11	)		(3	)		(241	)		(160	)		(10	)		(4	)		(240	)		(158	)
Amortization net (gain) loss		677			8			(6	)		13			676			8			(5	)		(26	)

Net periodic benefit cost	$	1,626		$	101		$	549		$	737		$	1,627		$	331		$	382		$	538


Six months ended June 30,
Nine months ended September 30,
Service cost	$	1,055		$	1,091		$	433		$	505		$	1,582		$	1,590		$	610		$	675
Interest cost		5,578			5,611			1,159			1,263			8,367			8,449			1,609			1,815
Expected return on plan assets		(4,711	)		(6,510	)		—			—			(7,066	)		(9,518	)		—			—
Amortization prior service cost		(22	)		(6	)		(482	)		(319	)		(32	)		(10	)		(722	)		(478	)
Amortization net (gain) loss		1,353			16			(11	)		26			2,029			24			(16	)		—

Net periodic benefit cost	$	3,253		$	202		$	1,099		$	1,475		$	4,880		$	535		$	1,481		$	2,012


	For the three months ended
	June 30, 2009		June 30, 2008
Gain recognized in OCI on the effective portion of the derivatives, net of tax	$	5,539	$	13,342

Loss reclassified from Accumulated OCI into Interest Expense (Effective Portion)		3,025		—

Gain recognized in Interest Expense on the ineffective portion of the derivatives		39		—


	For the three months ended
	September 30,			September 30,
(In thousands)	2009			2008
Loss recognized in OCI on the effective portion of the derivatives, net of tax	$	(144	)	$	(2,150	)

Loss reclassified from Accumulated OCI into Interest Expense (Effective Portion)		(2,884	)		—

Gain (loss) recognized in Interest Expense on the ineffective portion of the derivatives		(7	)		2,406


	As of September 30, 2009				As of December 31, 2008
(In thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Investments, equity basis	$	49,133		n/a	$	46,817		n/a
Investments, at cost	$	44,400		n/a	$	44,400		n/a
Long-term debt	$	880,000	$	880,000	$	880,000	$	880,000


	Three Months Ended					Six Months Ended					Three Months Ended						Nine Months Ended
	June 30,					June 30,					September 30,						September 30,
	2009		2008			2009		2008

(In thousands)											2009			2008			2009		2008
Net income	$	7,659	$	313		$	11,356	$	4,294		$	7,283		$	5,116		$	18,639	$	9,410
Other comprehensive income (loss):
Prior service cost and net loss, net of tax		261		(90	)		521		(180	)		259			(115	)		780		(295	)
Change in fair value of cash flow hedges, net of tax		5,539		13,342			6,683		122			(143	)		(2,150	)		6,540		(2,028	)

Total other comprehensive income (loss), net of tax		5,800		13,252			7,204		(58	)		116			(2,265	)		7,320		(2,323	)

Comprehensive income		13,459		13,565			18,560		4,236			7,399			2,851			25,959		7,087
Less: Comprehensive income attributable to noncontrolling interest		136		133			543		405			226			145			769		550

Comprehensive income attributable to Consolidated Communications Holdings, Inc.	$	13,323	$	13,432		$	18,017	$	3,831		$	7,173		$	2,706		$	25,190	$	6,537


	Six Months Ended June 30,
	2009			2008
OPERATING ACTIVITIES
Net income	$	11,356		$	4,294
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		42,658			45,221
Loss on extinguishment of debt		—			9,224
Deferred income tax		1,392			(3,148	)
Partnership income		(1,972	)		(821	)
Non-cash stock compensation		932			860
Amortization of deferred financing costs		655			806
Changes in operating assets and liabilities:
Accounts receivable		(1,137	)		(776	)
Inventories		414			(871	)
Other assets		1,678			(3,078	)
Accounts payable		(1,546	)		(4,588	)
Accrued expenses and other liabilities		(6,432	)		(4,943	)

Net cash provided by operating activities		47,998			42,180

INVESTING ACTIVITIES
Proceeds from sale of assets		300			—
Capital expenditures		(20,375	)		(26,286	)

Net cash used in investing activities		(20,075	)		(26,286	)

FINANCING ACTIVITIES
Proceeds from long-term obligations		—			120,000
Payments made on long-term obligations		—			(136,337	)
Payment of deferred financing costs		—			(240	)
Payment of capital lease obligation		(453	)		(496	)
Purchase and retirement of common stock		(9	)		(8	)
Dividends on participating securities		(126	)		—
Dividends on common stock		(22,781	)		(22,721	)

Net cash used in financing activities		(23,369	)		(39,802	)

Net increase (decrease) in cash and cash equivalents		4,554			(23,908	)
Cash and cash equivalents at beginning of period		15,471			34,341

Cash and cash equivalents at end of period	$	20,025		$	10,433


Classification as of			Classification as of
June 30, 2009	Fair Value		December 31, 2008	Fair Value
Other Liabilities	$	37,326	Other Liabilities	$	47,908


	For the six months ended				For the nine months ended
	June 30, 2009		June 30, 2008		September 30,			September 30,
Gain recognized in OCI on the effective portion of the derivatives, net of tax	$	6,683	$	122
(In thousands)					2009			2008
Gain (loss) recognized in OCI on the effective portion of the derivatives, net of tax					$	6,540		$	(2,028	)

Loss reclassified from Accumulated OCI into Interest Expense (Effective Portion)		5,880		—		(8,764	)		—

Gain recognized in Interest Expense on the ineffective portion of the derivatives		62		—		55			2,406


	Measurements
	Using Significant
	Unobservable
	Inputs (Level 3)
	Interest Rate
(In thousands)	Swaps
Balance at December 31, 2008	$	47,908
Settlements		(14,852	)
Total gains or losses (realized/unrealized)
Unrealized gain included in earnings		(62	)
Unrealized gain included in other comprehensive income from basis swap		(1,361	)
Unrealized loss included in other comprehensive income		5,693
Transfers out of level 3		(37,326	)


Balance at September 30, 2009	$	—


The amount of total gain for the period included in earnings as a component of interest expense	$	62


(1)		CLEC access line equivalents represent a combination of voice services and data circuits. The calculations represent a conversion of data circuits to an access line basis. Equivalents are calculated by converting data circuits (basic rate interface, primary rate interface, DSL, DS-1, DS-3 and Ethernet) and SONET-based (optical) services (OC-3 and OC-48) to the equivalent of an access line.

(2)		Reflects the inclusion of long distance service provided as part of our VOIP offering while excluding CLEC long distance subscribers.


	Three Months Ended June 30,
	2009						2008
				% of Total						% of Total
	$ (millions)			Revenues			$ (millions)			Revenues
Revenues
Telephone Operations
Local calling services	$	24.3			23.8	%	$	26.5			24.9	%
Network access services		22.1			21.7			24.6			23.1
Subsidies		13.4			13.1			13.4			12.6
Long distance services		5.4			5.3			6.3			5.9
Data and internet services		16.7			16.4			15.2			14.3
Other services		9.2			9.0			9.6			9.0

Total Telephone Operations		91.1			89.3			95.6			89.8
Other Operations		10.9			10.7			10.9			10.2

Total operating revenues		102.0			100.0			106.5			100.0

Expenses
Operating expenses
Telephone Operations		52.1			51.1			52.9			49.7
Other Operations		10.1			9.9			10.2			9.6
Depreciation and amortization		21.0			20.6			22.3			20.9

Total operating expenses		83.2			81.6			85.4			80.2


Income from operations		18.8			18.4			21.1			19.8

Interest expense, net		(14.5	)		(14.2	)		(16.0	)		(15.0	)
Other income (expense), net		8.5			8.3			(4.6	)		(4.3	)
Income tax expense		(5.2	)		(5.0	)		(0.2	)		(0.2	)

Net income		7.6			7.5			0.3			0.3
Less: Net income attributable to noncontrolling interest		0.1			0.1			0.1			0.1

Net income attributable to Consolidated Communications Holdings, Inc.	$	7.5			7.4	%	$	0.2			0.2	%


	Consolidated Communications Holdings, Inc. (Registrant)

Date: ~~August 7,~~November 6, 2009	By:	/s/ Robert J. Currey
		Robert J. Currey
		President and Chief Executive Officer ~~(Principal~~ (Principal Executive Officer)


Date: ~~August 7,~~November 6, 2009	By:	/s/ Steven L. Childers
		Steven L. Childers
		Chief Financial Officer (Principal Financial Officer and Chief Accounting Officer)


Exhibit
Number		Description

	~~10.1~~3.1		Amended and Restated By-Laws of Consolidated Communications Holdings, Inc. 2005 Long-Term Incentive Plan (As Amended and Restated Effective May 5, 2009) (incorporated by reference to Exhibit A to the Company’s 2009 Proxy Statement for the Annual Meeting held on May 5, 2009)., as amended as of November 2, 2009.

	31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.